There are certain situations in business that may make invoice factoring difficult. One of them comes up generally when the factoring client is a sub-contractor on a contract. Most of the time the language in the sub-contract agreement has conditions that require the prime to be paid by the end user before they are obligated to pay their subs. The sub-contractor in this case has no leverage in receiving timely payments on their invoices as long as the prime has an excuse, written into the contract, not to pay. A factoring company will not like to be put into this situation. The factor does not work well when there is an “excuse†allowing non-payment for work provided and accepted. In rare situations, the factor may be able to get the prime to sign an estopple letter that would supersede the existing agreement. In such cases the prime is agreeing to pay in the agreed amount of time, regardless of the pay when paid condition. Usually the only time the prime would be willing to sign such a letter is when the sub-contractors work is critically important to the job continuing. In the construction industry, where this is prevalent, there are property lien and bonding issues that can change the complexion of these conditions as described.
But a paid when paid clause in a contract might result in accounts receivable financing being unavailable for that particular contract.