Every so often, a client may want to factor an invoice that is due in 90 days or more. These types of invoices become more common during difficult economic times. Unfortunately, some larger companies are permanently moving their payment terms to net-90 and beyond for all suppliers. This time frame may help the larger company’s cash flow, but it is often a challenge for the supplier. In this article, we explain why these invoices can’t be factored.
Can factoring help?
In principle, factoring is an ideal solution for this type of problem. The factoring company advances funds to the client and holds the slow-paying invoice until maturity. The only problem is that most factors cannot finance an invoice that is payable in net-90 (or over net-90) terms. There are three reasons why these invoices cannot be factored:
Reason #1: Insurance and bank terms
Many factors get most of their financing from conventional banks and other lending institutions. Furthermore, many use credit insurance to protect them from major invoice defaults. Most bank financing contracts and credit insurance contracts have covenants that specifically exclude net-90 invoices. These covenants are ironclad and prevent factors from financing these invoices.
Reason #2: Increased risk
As a rule of thumb, the longer it takes a company to pay an invoice, the higher its risk of default. Why? Simply put, most companies delay paying invoices in order to conserve cash. By demanding net-30 terms, customers get the equivalent of a short-term, interest-free loan, which improves their cash flow. However, taking too long to pay an invoice is often considered a sign of financial distress and often precedes a default. As a result, factoring companies generally avoid these invoices.
Reason #3: Cost
Even if you could factor net-90 invoices, it would not be a good idea. In general, factoring is a comparatively expensive solution. Furthermore, the cost of financing receivables increases as the invoices remain unpaid. Unless your profit margins are very high, financing these invoices may be counter-productive.
There are some exceptions to these rules. A few excellent, well-recognized companies have recently moved their payment procedures to net-90 terms. In some instances, a factor can make an exception and finance invoices for these specific companies. However, these exceptions are rare since the client needs to have exceptionally high profit margins.
Get a quote
We can provide you with a competitively priced factoring quote. For more information, call us toll-free at (877) 300 3258.