Business owners who are considering factoring receivables often comment 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.” Or, “can you do transparent factoring?” Like what we do is somehow wrong and shameful. How’d you like it if your customers treated you like that!?
We receive calls all day from businesses that are looking for funding. Many we have to turn down for one reason or another. Having a business that qualifies for commercial financing is a good thing. It shows that you are far enough up the business ladder to be approved by an outside source of capital, which is a strong statement in a company’s development.
But let’s consider the matter at hand. When a borrower enters into an agreement to receive advances on their invoices, they are essentially selling the rights to 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 should seem logical that the CUSTOMER (account debtor) would have to be aware this happened. From our point of view it’s not only logical it’s essential that the account debtor is legally notified that the proceeds of the completed invoice have been assigned. Probably the single most critical part of factoring invoices is that the account debtor pays the factor directly. The check always must come to our lockbox. There’s no sneakiness tolerated in a proper up front commercial finance transaction.
Now having said that, the NOTIFICATION and VERIFICATION of invoices is handled slightly differently by every factoring company. And usually a good factoring company will tailor their processes to meet the needs of you, their CLIENT. This includes a low key approach that gets us the basic information we are requesting, without adding any extra burden to the existing relationship between you and the customer. It is handled in a smooth professional manner for this reason – If what we do caused any disruption in your business, then that would have an adverse affect on our business – fewer invoices to fund.
So bottom line, everyone has to be in on the deal. But if handled properly, factoring is seen as a positive growth step to the ongoing success of any business.