It might seem like an easy question, but when it comes to accounts receivable factoring it really has a specific definition. The answer relies primarily on the acceptance from the account debtor.
When any company provides a service or sells a product to a customer, they make the sale based on terms – either C.O.D. or net payable terms that offer the customer time to make the payment. When terms are offered, the company submits an invoice which is a demand of payment for services rendered. That demand note in the form of an invoice is technically a loan from the company to their customer. The company is now waiting to be paid.
But an invoice is not really an obligation until the customer accepts the work. Whether using commercial financing for your accounts or not, having the customer recognize and agree to this obligation is both critical and helpful to insuring proper payment. Too often a customer will hide behind paperwork and miscommunication in an effort to stall making payments. Having a robust system in place to verify your invoices is a very efficient method to keep your working capital optimum.
From a factoring company’s point of view, when we are designing to purchase a particular invoice and have the proceeds assigned to us, knowing that all the work is completed is paramount. Partial shipments, pre-billing, unfixed warranty issues are all examples of invoices that have not been 100% accepted by the customer. For the factor the bottom line is we need to be able to call upon the customer independently for payment without the possibility of non-payment from unacceptable performance of any sort making the accounts collectible.