Should You Factor Invoices That Are Collections Problems?

Every so often we get a call from a prospect interested in factoring old invoices. By “old” we mean an invoice that is substantially past due – 120 days old or more. The short answer is that those invoice are impossible to factor and no factoring company will purchase them. A factor will purchase a slow-paying invoice from a creditworthy company, but it will not purchase a defaulted invoice.

What is factoring?

Factoring is a tool that you can use to improve your cash flow, but it works only if your customers are solid – albeit slow – payers. This is actually a very common occurrence. Most large companies tend to be solid payers, but they also pay slowly. The main reason large companies pay slowly is that it helps their own cash flow. These types of invoices – those that are up to net 60 days and from creditworthy customers – are good candidates for factoring.

Learn more by reading “What is factoring?

The 90-day clause

Most receivables financing agreements have a 90-day clause which stipulates that an invoice must be paid by your customer in 90 days or the factor has the recourse to sell the invoice back to the client. Basically, you are assuring the factor that the invoice is payable in 90 days. This is the most common type of agreement.

Non-recourse factoring agreements have an exception to this clause. If the invoice defaults due to a declared insolvency (e.g., bankruptcy) of the customer during the 90-day window, the factor absorbs the loss. Note that non-recourse agreements protect you only if your client declares insolvency and do not protect you from other reasons of non-payment.

To learn more, read “Types of factoring financing – recourse and non recourse“.

What happens if an invoice defaults?

What happens in case of a default depends on two things: the type of factoring you use and the reason for the default. If your client does not pay an invoice because of a dispute or they are a bad payer, you must absorb this cost. Unfortunately, there is no protection against disputes, and the factor cannot choose a side.

However, if you have a non-recourse agreement and your invoice defaults because of a declared bankruptcy during the 90-day window, the factor absorbs the loss. It should be noted that factoring companies evaluate each invoice’s creditworthiness prior to financing and will likely detect an invoice with bankruptcy risk.

In conclusion

Factoring companies do not finance invoices in a default state or invoices with a high chance of default.

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We can provide you with a competitively priced factoring quote. For information, Please call (877) 300 3258.