One common misconception is that factoring companies buy old invoices. This is actually not true. Factoring companies by slow paying invoices from credit worthy customers, which helps your cash flow. Factoring companies don’t buy old invoices.
By our definition, an old invoice is any invoice that is 90 days past terms is considered to be “old”. Most companies consider these invoices to have very little chance of getting paid – in other words they are collection problems. While it’d be great to be able to sell those invoices, you’ll find that there is a limited market for them – mostly collection companies. These invoices are best handled by a collections lawyer.
So, why would you factor an invoice? And, what invoices can be factored?
Factoring is a financial tool that is used to accelerate the payments from slow paying but credit worthy customers. For example, it’s common for small companies to sell products/services to larger companies and offer then net 30 payment terms. This gives the larger company 30 days to pay their invoice. However, it’s not unusual for customers to pay their invoices a few days past due – say in 40 days (or even 50 days) rather than 30 days. In this case, a factoring company can help you by advancing funds against your slow paying invoice. This gives your company the necessary funds to meet it’s current obligations and relieves the pressure from having to wait until your customer pays. The transaction is settled once your customer pays the invoice in full. The two key points to remember are the the invoice is payable in 30 to 60 days and the invoice is payable by a credit worthy commercial customer.
In summary – invoice factoring is a tool that you would use to accelerate your cash flow from credit worthy customers and not a tool that you can use with commercial customers with credit problems.
