If you are considering using accounts receivable factoring as a financing tool, you should carefully consider the type of billing arrangement you have with your customers. Invoice factoring relies on important considerations concering your business model that could make it easier to get funding.

When you initially set up your agreement with the customer, you should specifically outline the work to create The factoring company has advanced
a significant amount of funds up front,
so they are left holding the bag when
the customer refuses to pay.deliverables or milestones that allow you to invoice. By setting these milestones, the customer is obligated to pay for the work to that point and you can generate an invoice for that part of the goods or services. Contrast this scenario to progress billings, an arrangement in which the customer advances money for the job as a whole. The factor is hesitant to advance funds to the client with progress billings, since the company getting billed may become unhappy along the way and stop making payments. With milestones, on the other hand, that is not a problem.

Pre-billing for services is another example of a problem for factoring invoices. Common to the publishing and advertising industries, the customer is invoiced for a publication that will run in the future. From a factoring standpoint, proceeds of the obligation are assigned to a third party. If the work has not been satisfactorily completed, the customer likely will not pay the entire amount, if at all because there are too many "outs". The factoring company has advanced a significant amount of funds up front, so they are left holding the bag when the customer refuses to pay. In this situation, the factoring company will almost assuredly adopt recourse factoring. This means that if the customer doesn't pay the client the full amount that was invoiced, the factoring company can collect the money that was advanced.

Even if you don't need to factor your invoices, it is usually better to structure your invoicing in such a way that the customer is obligated to pay during each step in the process. The milestone arrangement is the best way to accomplish this goal.

Click here to read our blog on Accounts Receivable Factoring.