Regarding ongoing long term contracts and methods of billing, there is definitely a preferred method when it comes to invoice factoring. Generally speaking there are two options, milestone billing and progress billing. With milestone billing you include levels of work that when completed allow you to bill. For instance; once you order material for a job and it arrives at a location – that would be milestone. Or once you have the plans approved for the wiring of a conference room – a milestone. The benefit here being the work for that particular part of the contract is completed and accepted by the end user.
Progress billing on the other hand is when you take a large contract and divide it evenly over a period of time, once a month let’s say. So it’s a $300K contract over 7 months which means roughly $43K a month billing irrespective of the work that is being completed. Here is why commercial finance lenders (including banks) have problems with this arrangement. Let’s say the factor has made advances on the monthly payments for months one and two and are awaiting payment. And somehow the job goes sideways and the customer is withholding payments until whatever the issue is can be straightened out. Now the factor is in the middle of a full blown contract dispute and has to sit by and watch until the dust settles and hopefully the customer will agree to pay the outstanding invoices. That’s progress billing.
When a milestone on a contract has been accepted by the customer there is no turning back when it comes to work being done in the future. The transaction is clean, that section of the contract was completed, accepted (sometimes in writing) and the factor doesn’t really need their client to remedy a non-payment issue. Even if the client / customer relationship goes sour, the factor has evidence the payment should be made with regards to the terms and conditions of a signed contract.
If you are providing ongoing work and haven’t decided yet to use factoring or commercial financing, you should consider having your contracts milestone based. If you make this a regular practice and one day you are seeking to secure working capital you will earn tremendous goodwill and usually have a better experience with your lender.