The misperception of using factoring starts with something like this “my accountant suggested we look into factoring our invoices but we don’t want our customers to know about it.” It’s often compounded by the misuse of “we want it to be transparent” when they really mean opaque.
This objection to factoring is entirely a perception issue when it comes to how the customer perceives your company – but it is a very important legal issue when it comes to the actual funding of accounts.
Companies large and small operate using commercial financing by having payments from customers go to a separate lockbox. It is an accepted way of doing business. Managing the perception of doing this relies on the company using financing to always be punctual, reliable, consistent and reachable. If your company is doing all of these things, the matter of where and how you secure your financing is no longer questioned.
A factoring company receives calls from businesses that are looking for funding. Many are turned down for various reasons. If your company qualifies for commercial financing, that’s great. It shows that your business is doing something well enough to be approved by an outside source of capital, which is a powerful statement for any emerging business.
When a borrower enters into an agreement to receive advances on their accounts, they are essentially selling the proceeds related to those invoices to a third party (the factor.) The factoring company owns the invoice now as an asset against the money we just wired into your bank account. It’s essential that the account debtor (customer) is legally notified that the proceeds of the completed invoice have been assigned.
The single most critical part of factoring invoices is the account debtor pays the factor directly. The check always must come to our lockbox. Typically large customers are very familiar with this process and have no issues complying with protocol.