When you are looking into accounts receivable factoring do not ask for something along the lines of “my accountant suggested we look into factoring our invoices but we don’t want our customers to know about it.” Factoring companies receive calls all day from businesses that are looking for funding. The majority have to be turned down for one reason or another. If your company qualifies for commercial financing, that’s a good thing. It shows that your business is mature enough to be approved by an outside source of capital, which is a strong statement when considering the future growth of a company. It insures that the next step of securing institutional financing will be easier with some historical financing on record.
Here’s what you need to know, when a borrower enters into a factoring agreement to receive advances on their invoices, they are essentially selling the proceeds of those invoices to a third party. The factoring company owns the invoice now as an asset against the money wired into your bank account. It’s essential that the account debtor (customer) is legally notified those proceeds of the completed invoice have been assigned. Probably the single most critical part of factoring invoices is that the account debtor remits payment to the factor directly. The check always must come to our lockbox. There is no other mechanism to provide factoring for working capital. You do the work, you invoice, the factor pays you and the customer pays the factor. A simple transaction.