Factoring as a form of commercial financing is considered short term capital, meaning the length of time the amount is outstanding is a short period. This is relative to bank financing where the loan is made over the period of a year or years. Because clients using invoice factoring cannot secure annual capital they use this short term capital as a way to grow their company. This works because the factor keeps the client on a shorter leash and can see or avoid trouble sooner.
But factoring is only viable for situations where an invoice is paid within 90 days. Contract situations that offer longer payment terms will not be a good fit for factoring. Primarily because the factoring company has its own financing, our clients are leveraging our ability to borrow. The lender to the factor considers invoicing that has aged over 90 days to be considered a non-performing asset and thereby is removed from the borrowing base. Essentially old invoices inhibit the factor from having funds available to purchase more invoices.
Typically in a factoring arrangement, if an invoice goes over 90 days the client is asked to provide a new invoice, from a different customer, to replace the overdue payment. The advance from the new invoice goes to retire the old one. This can happen in either full or non-recourse factoring depending on the circumstances of the non-payment. This swapping out of the old invoice is fairly rare and if it becomes more frequent the relationship between the factor and its client may go under review.