When investigating invoice factoring as an option for solving cash flow challenges, you may have questions about the actual invoices you factor. Some businesses may not need to factor every invoice while others may not want to factor a certain customer invoices. In cases like this, is invoice factoring the best option for these businesses? Although some factoring companies may not work with a business who is not willing to factor all their accounts receivable, we believe our clients should have the choice on which invoices to factor.
There are many reasons why a Client would not want to factor all of their invoices or only factor one particular customer. Some reasons include:
- They don’t need money for all their invoices upfront, only for a certain amount
- Certain customers may not want the client to factor their invoices
- Clients only wants to factor their slower paying customers
- The Client only has one customer and thus only one account to factor
We’ve dealt with many Clients who fit into the reasons above, as well as other reasons for only wanting to factor one of their customer’s invoices or to choose which invoices they would like to factor.
Every client is a case by case basis, because every Client must meet our requirements for factoring. However, once they are approved, we believe the Client should make their own decision regarding which invoices to factor, within reason.
Am I Required to Factor Every Invoice?
Many factoring companies will compel their Clients to submit all of their customers' invoices for factoring. Some of these invoices may be rejected based on poor credit or other determining reasons. This requirement typically varies from company to company.
The reason most factoring companies prefer their Clients factor every invoice is because there’s a risk to the factoring company if a Client doesn’t factor all their invoices. When some invoices aren’t factored, the factoring company does not have access to the Client’s entire list of debtors (the Client’s customers).
If a Client defaults on their factoring agreement and the factoring company does not receive payment on all invoices, they will foreclose on all accounts receivable as stated in their terms of agreement. To do this, they will collect on all the Client’s assets to make themselves whole from the loss that occurred when the Client defaulted.
If they do not have access to the Client’s entire list of debtors, they find themselves at risk and they may not be able to make up the loss.
This also is a reason why factors tend to approve Clients based on their credit. They want to be sure they assume the least amount of risk possible and they have determined this is the best way they can do it.
However, we do not always think this is the best way. We approve our Clients based on business references, among other things. These references allow us to ensure the Client is stable and strong with a good work ethic. We feel secure in the fact that they are an ethical and moral company who won’t default on their account with us.
Because of the way we approve Clients, we feel comfortable allowing our Clients to choose which invoices they would like to factor instead of compelling them to factor every invoice.
Can I Factor Just One Customer?
Most companies in the factoring industry state that any one customer in their Client’s list of debtors cannot exceed 25% of the invoices the Client factors. According to this rule, most factors will not allow Clients to factor the invoices of just one customer, since that one customer would then be 100% of the invoices factored.
Because of this, factors who adhere to this rule do not take accounts where one customer is a high concentration of the invoices factored or smaller Clients who may only have one or two current customers.
This is again because of the risk factor these factoring companies associate with their amount of access to a Client’s debtors. In this instance where they do not accept just one of a Client's customers or Clients with one or two accounts, they feel the risk is too high.
If the Client defaults, they only have one account to retrieve payment from, which could cause them to lose money if that customer cannot or defaults on payment for whatever reason.
In reality, there is an additional risk for a factoring company if the Client is selling a concentration of one or two customer’s invoices. However, at UC Factors, we are willing to take that risk in order to accommodate a wider variety of Clients whose needs may be different.
We will run a credit check on your customer as usual, and if the credit is approved for the amount you request, we see no problem with allowing you to factor just one account.
We want to operate in a way that allows our Clients to manager their own factoring practices and use our factoring services as an advantage to them, not a hindrance because of their company’s circumstances.
Am I Required to Factor All of One Customer’s Invoices?
We usually recommend that our Clients factor all of a given customer’s invoices, because this helps keep the customer from getting confused.
However, if a Client does not wish to factor all of their customer’s invoices, we must have all payments go through UC Factors. If the customer has to pay certain invoices to the factoring company and certain invoices to the Client, it tends to create a mess for everyone.
Most factoring companies will charge a fee for this type of transaction, if they allow it at all. They feel that the administrative time and resources it takes to process the non-factored invoice (i.e. the invoice they are not getting paid on) requires a fee from the Client.
UC Factors chooses not to charge a fee for this service as we simply want to make the process easier and less confusing for the Client, the Client's customer, and ourselves.
Many factoring companies do not allow their Clients to choose which invoices to factor or which customers they would like to factor. They do not offer this type of flexibility.
However, at UC Factors, we feel that this practice alienates many businesses who need the benefits of factoring in the first place and thus do not see the need to implement this practice.
We instead base our acceptance on elements like business references that tend to lessen the risk of Client defaulting in the first place. Because of this, we are able to allow our Clients to choose which invoices to factor and give them the flexibility to gain access to cash flow in a way that is beneficial to them.
Interested in learning more about invoice factoring? Learn how to recognize which invoice factoring company is right for you in our free guide!