Recently I was writing in a discussion forum with some accountants about the use of accounts receivable factoring and specifically how the work being performed by our clients must be completed and accepted. Submitting invoices for funding prior to the product being delivered or the service being completed is called “pre-billing.” For example, products being shipped in stages, you cannot invoice for the entire shipment sold until it all reaches the customers’ destination.
The reason pre-billing is an issue and why a factoring company will not fund those invoices is the potential for the customer to refuse to pay the invoice because they did not receive their complete order. And should this end up in a legal situation, the factor needs to win in court on a collection action. Without proof that the service has been fully rendered or the purchase order fully received, the court will be reluctant to side with the lender. A factoring company has to verify their collection rights are solid in order to mitigate the risk involved in making an advance on accounts.
Because the verification process of contacting the customer to make sure the invoice is live, the collection issue is rarely invoked. It only means a pre-billed invoice will not be funded until the work is completed.