Whenever a business offers payment terms to their customers – they become a sort of lender. The customer owes for the work, and the business is waiting for payment, essentially a business loan. There are things a business should note when offering terms that may bring beneficial results when looking to factor their invoices. If a company has a strategic financial plan with the intent to secure invoice factoring, then knowing what makes the transaction attractive may make a big difference.
A contract for payment might include one of the following terms; milestone payments or progress payments. For a factoring company, these distinctions are critical to securing financing. Milestone payments in a contract are very specific deliverables outlined in the agreement whereby when the milestone has been finished, the customer will pay an agreed amount. Progress payments, on the other hand, only allow for regular percentage payments of the entire contract. For example, on a million dollar contract the customer agrees to pay the business $100,000 a month. The difficulty with this arrangement, for a factor is – for whatever reason if the customer is dissatisfied with the work they will stop making payments. This puts the factor in jeopardy trying to recover any capital advances. Many banks and finance companies will not make a loan on a progress billing contract.
By specifying very tangible work events, for example, the customer can verify they received a product or service outlined in a contract, the factoring company will feel satisfied to make an advance on the future payment. By knowing this distinction ahead of time, and negotiating the necessary changes to the contract it will better guarantee access to outside capital further on down the line.