Because accounts receivable factoring is a specialized form of commercial financing, there are important considerations concerning how your business model operates. The terms and arrangements you have you set up with customers is more important than you might think. Just a slight change in the way you bill for your services could make or break the ability to secure financing on the receivables.
For example, if your business provides a service, you should always specifically outline the work to be done and create “deliverables” or “milestones” that allow you to invoice. From a factoring company’s standpoint, this is much more preferable than billing along the way or progress billing. By completing a milestone the customer is obligated to pay for something that they received. With progress payments the risk is the customer becomes upset with the work and stops making their usual payments.
A factoring company must be able to independently, if needed, go after the account debtor (customer) for payment of the invoice. This means that the work has to be completed and acceptable to the customer. Then the customer has no legal reason not to pay the invoice in full, and could be asked to defend non-payment in court. With a progress payment there is too much grey area and maneuvering room that could allow the customer to walk away from their obligation. A clean delineation is preferable of work to be considered for invoice factoring.