Invoice factoring is beneficial to not only your company, but also your own customers. When you choose to work with an invoice factoring company, you will have access to cash to continue to grow your business. You will also have the security provided by your factor in the form of credit and background checks on all your customers. This will allow you to have a good working relationship with your customers and allow your customers to work with a successful company. However, what happens if your customer cannot or will not pay their invoices?
When you work with an invoice factoring company, they are purchasing your invoices which will give your company access to cash. Without factoring, these funds would have been untouchable until the invoice was paid, which could take anywhere from 30 to 90 days.
As your customers pay their invoices according to your agreed upon terms, the factoring company gets paid and the cycle continues with as many invoices as you choose to factor. However, if your customer does not pay their invoice according to the terms, the factoring company will not get paid. What happens at this point for you, your customer, and your factoring company?
Steps to Take When a Customer Does Not Pay
If you are working with a factoring company and your customer has not paid on their factored invoice within set terms, there are a few steps the factor will take to pursue payment:
- The factor will make collection calls to your customer
- The factor will send demand letters to your customer
- The factor will finally pursue alternate collection avenues, including sending the account to collections or *requiring you, the client, to pay the full amount of the invoice (*Full Recourse Accounts Only).
Depending on the type of account you have with your factoring company, there are two options your factor will pursue if your customer refuses to make payment after collection calls and demand letters have been sent.
If you have a full recourse account, you, the client, will be ultimately responsible for the payment of the invoice. If your customer does not pay the required amount, you will be held accountable to pay the amount advanced, plus fees back to your factoring company.
If you have a non-recourse account, the factoring company has extended credit to your customer solely.
In this case, after they have pursued the same avenues as above, the factor will send the account to a collection agency instead of requiring you, the client, to pay back your customer’s account. These collection agencies tend to charge, on average, 20% on receivables.
The exception to this rule occurs when a customer has filed bankruptcy. In this case, your factoring company will make a claim for their payment, but you, the client, will still not be responsible for paying back your customer’s account.
How Your Factoring Company Encourages Customers to Pay Their Invoices
One of the benefits of working with a factoring company is your customers tend to pay quicker if they are dealing with a factor. Factoring companies can help with the turnaround of client receivables as well as performing credit checks to ensure your customers’ ability to pay in the first place.
A factor also has the expertise to pursue collection accounts and customers tend to hold factoring companies in high regard because they are financial institutions.
Since a factor does have the means to impact a customer’s credit, the customer is willing to pay quicker than if they were simply dealing with you alone.
In addition to providing knowledge on pursuing delinquent accounts, factoring companies also have the means to pursue.
If you are a smaller or a new company, you may not have the ability to take the steps needed to pursue payment from these accounts. A factoring company has the means and resources to take these steps so you do not have to be concerned that it is too much work or too costly to pursue payment.
At UC Factors, our experience has taught us that it is worth taking the time to develop relationships with the clients and their customers. This allows us to learn the nuances of each account and make sure we are working with the customers the best way we can to encourage timely payment.
This includes making notes on any issues that appear on credit reports or from past experiences, ensuring our client is sending their customer the correct paperwork and documentation, and taking the time to pursue payment from the customers before we send them to any kind of collections.
These steps to collect payment from our clients’ customers sets us apart and allows relationships to grow and trust to be formed.
Because we take the time to develop this, our clients’ customers will be more apt to pay in a timely fashion and not hold up the process for you - the client, or us - the factor.
While invoice factoring is a great option for businesses who need to increase their cash flow, it can be troublesome if you are working with customers who are having trouble paying their invoices.
However, a factoring company will not only be able to run checks to determine if your customers have the ability to pay their invoices, but they also have the means to pursue payment in the case of a delinquent payment on a factored invoice.
This will allow relationships to grow between you, your customer, and your factoring company and encourage the customer to pay in a timely fashion in the future.
The best way to ensure you keep your relationship with your customers regardless of if they do or do not pay is to have a factoring company that respects that relationship. Learn how to choose the best factoring company for you here: