Most invoice factoring transactions tend to be very hands on, and therefore demand that all the parties work well together. This is perhaps one of the drawbacks of this type of financing. It has a lot of moving parts and requires a little bit of effort to make sure that everything works out well. This short post will cover some of the more common issues that prevent clients from factoring their invoices. It will help you understand what went wrong and how/if to fix it.
1. The customer has credit problems
If your customer has credit problems, their invoices won’t be factorable. Unfortunately, there is nothing you can do about that since the whole premise of factoring invoices is that you can leverage the credit of your clients.
2. You exceeded your financing line
This problem is somewhat related to the previous one. Basically you submit an invoice for financing and it’s declined because the outstanding balance with that customer is too high, or your overall balance is too high. The way to solve this problem is to negotiate with your factoring company to get a line increase. Perhaps you can offer to factor invoices from a previously unfactored customer, which increases invoice diversity and decreases total risk?
3. Your customer will not send the payment to the right party
One of the important details of factoring is that your customers must submit the payment directly to the factoring company. They are notified about this through the notice of assignment. This can be a serious issue because it’s a legal matter – and it could put your customer relationship in jeopardy. You should seek the advice of your factoring provider, and possibly an attorney that is familiar with finance law.
4. Your customer refuses to verify an invoice
Many factoring companies will verify an invoice before financing it. Basically, they contact the customer and verify that the invoice is accurate and due for payment. This is done as a quality control process. However, the factor may decline to finance the invoice if your customer can’t – or won’t – verify it. Like item #3 in this list, this is a delicate matter and you should seek competent advice on how to handle it. However, sometimes a simple and polite (and professional!) call to the customer may be all that is needed to fix this.
5. The work is incomplete
To be able to factor an invoice the work (or product) must have been completed, delivered and accepted by your client. Invoices that are submitted before the work is completed are not factorable. The only solution is to complete the work or deliver the product.
6. Invoice disputes
Although invoice disputes are very common, they are very tricky to handle when factoring receivables. One side side, the client says “factor the invoice – I’ve delivered”. On the other hand, the customer says “There is a problem and we aren’t paying!” And the finance company is right in the middle of it. Most factoring companies will refer this situation to the client and will not factor the invoice until it’s resolved. Having said that, resolving the issue should be what you try to do, whether you factor the invoice or not.