Invoice factoring is a unique form of commercial financing which requires consideration about how your business model operates. The terms and arrangements set up with your customers are more important than you might think. Just a slight change in the way you bill for your services could make or break the ability to secure financing on the receivables.
For example, if your business provides a service, always specifically outline the work to be done and include them in your contract as “deliverables” or “milestones” that allow you to invoice when completed. From the factor’s standpoint, this is much more preferable than billing along the way known as progress billing. By completing a milestone – the customer is obligated to pay for something they received. With progress payments the risk is the customer becomes upset with the work and stops making their payments.
A factoring company must be able to independently, if needed, make a demand of the account debtor (customer) for payment of the invoice. This means that the work has to be completed and acceptable to the customer. Then the customer has no legal reason not to pay the invoice in full, and could be asked to defend non-payment in court. With a progress payment there is too much grey area and maneuvering room that could allow the customer to walk away from their obligation. A clean cut off of the work is preferable when being considered for invoice factoring.