Invoice factoring can be extremely beneficial for businesses who are looking to increase cash flow without taking out a loan or a line of credit. However, as you begin to factor your invoices with your factoring company, you may be wondering if every type of invoice you have can be factored. If you have invoices that are different from a typical invoice or standard invoice terms, will you be able to reap the benefits of invoice factoring?
In an ideal world, every invoice would be simple and easy to reconcile. However, that is not always the way things work and sometimes there are invoices that fall outside the realm of “normal.”
In cases like this, we have many clients that wonder if their invoices are still able to be factored. While the answer to this may vary case by case, we do have a few “irregular” types of invoices that we often see.
Can I Factor Invoices with 90 Day or Longer Terms?
Typically, factoring companies will not purchase invoices that will take 90 days or longer to pay. The reason for this usually lies in the credit agreement the factor has with their bank. Banks only extend credit for invoices up to 90 days; beyond that, the invoices are deemed ineligible.
Factors also typically will not accept invoices with 90 day or longer terms because the potential for bankruptcy presents an additional risk. If an account pays in 90 days and then goes bankrupt, the factoring company will lose the money on any open invoices.
Additionally, they will have to pay back any collected invoices from the previous 90 days from the date the bankruptcy is filed. This is because the bankruptcy court will judge those payments as preferential and outside of normal industry terms.
As with most things, there are exceptions to this rule. For example, a factor could set up a delayed purchase contract with their client and agree to delay the funding of the invoice. This type of payment, however, is still considered outside industry terms.
Because of this, a delayed purchase program only applies for a very small amount of clients who have agreed to the delayed purchase program and who have an account debtor that is considered extremely solid. Having said this, in the majority of cases, a factor will not accept any invoice with terms of 90 days or longer.
Can I Factor Invoices from a Progressive Billing Service Contract?
Progressive billing occurs with larger projects where the service cannot be completed without a payment being made on the portion of work that has been finished.
These service contracts usually have provisions written into them that allows the business performing the service to bill in specific intervals with separate invoices as the projects progresses for the portions of work that have been completed until the service contract is completed.
These types of progressive billing contracts and invoices are typically seen from contractors or other areas in the construction industry where projects or other services that are billed with separate invoices as pieces are completed.
However, just because an invoice is generated does not mean a factoring company will be able to accept it. When a factor purchases an invoice, it is usually included in the contract that it must be contingent free.
If there are additional services or behaviors needed to make the invoice good, those are considered contingencies and most factors will not be able to purchase them.
The issue with an invoice that has been generated as a part of a progressive billing service contract lies in the fact that the project is being billed based on the work completed.
If the work runs behind schedule or is not completed according to the service contract, the payments could be affected due to penalties charged which would then impact the due invoice.
This causes a contingency with each invoice billed because there are still behaviors or services due that might affect the purchased invoice. This type of contingency is what makes progressive billing invoices ineligible to factor for most factoring companies.
While there might be factoring companies who specialize in progressive billing, most general factors will not be able to purchase these types of invoices since it includes these contingencies.
Can I Factor Invoices That Are Open Before I Sign with You?
When you sign with a factoring company, you may have a few invoices that you sent out to customers before the contract was completed. We often get questions asking if these invoices are eligible to factor.
At UC Factors, we typically recommend you do not factor open invoices for one main reason: the relationship with the customer.
We want to make invoice factoring as smooth and easy as possible for both our clients and their customers. When you choose to factor an open invoice, it creates a potential for a strained relationship with that customer.
The reason for that is the invoice has already been sent to the customer and most likely entered into their billing system. To factor the invoice, the customer would need to go back and change all that information to be able to send the payment to the factor instead of the client.
If a client really finds it necessary to factor open invoices, we recommend two things:
- That the invoice is less than 30 days old and there are no delinquent invoices on the account
- The client addresses the situation with their customer before the process begins so there is no shock and the customer can agree to it ahead of time
Are There Any Other Types of Invoices That Usually Won’t Work?
While the invoices listed above are a few of the main types of "irregular" invoice questions we receive, there are a many other types of invoices that a general factoring company may not be able to accept.
These can include:
- Medical invoices
- Attorney billing
- Invoices billed to an individual instead of a company
- Receivable due from a foreign company
However, just because your invoice may not be accepted by one factor does not mean that you will not be able to reap the benefits of invoice factoring. There are companies out there who specialize in certain industries such as construction invoices, medical invoices, or foreign invoices.
Your best option if you are considering invoice factoring is to always call and get a consultation. At UC Factors, we always make an effort to give you the best opportunity to factor your invoices.
If, for whatever reason, we are not able to purchase your invoice, we can always give you a few names of companies who specialize in that type of invoicing. The best thing you can do is ask!
Are you wondering if your company's invoices are going to be able to be purchased by your chosen factoring company? We can help you discover if the factor you choose is the right one for you!