How Will Invoice Factoring Affect Your Customers?

Close-up Of A BusinesswomaCalculating Invoice At Workplace

Learn about the minimal impact invoice factoring has on the customer relationship.

Sales invoice factoring is a financing option for small and large businesses alike. This off-balance-sheet financing option releases the cash locked up in accounts receivable, improving cash flow and increasing liquidity.

However, unlike other financing options, your customers will be aware that you have chosen to factor your sales invoices. And that fact can lead to concerns about the impact that factoring will have on customers.

So, what will customers think when they learn you are factoring your invoices? How will the move affect customer relationships? Here are the answers to the most common questions about how factoring affects customers.

Will Customers Think My Business is Struggling?

The fact that you outsourced your accounts receivable (AR) will be of little interest to your customers. Indeed, most people will be more interested in your products and service than how you finance your business.

Invoice factoring is far from uncommon these days. Many expanding businesses use factoring to fund growth. And, your business will likely be one of many of your customers’ vendors that use a factoring solution. It might even be the case that some of your customers use invoice financing, too. So, sales invoice factoring is most likely to be viewed by your customers as a wise move rather than a sign your business experiencing difficulties.

Related: The Pros and Cons of Invoice Factoring for an Expanding Business

What Do I Tell Existing Customers?

When you employ the services of a factoring company, the administrative change for customers is minimal. The only difference is that they will pay the factoring company instead of sending payment to you. However, you will want to reduce the risk of payments being sent to the wrong place. So, it is best to advise customers about the change in advance.

A letter to your customer’s accounts payable department will usually suffice. In that letter, you need to advise the customer that you will be factoring your invoices. And you need to specify a date for the change and provide the new payment details.

If you are concerned that customers might have the wrong impression of factoring, you might want to explain the move. For example, you are outsourcing your accounts receivable to improve efficiency and save administration costs. And you could point out that factoring will provide working capital for expansion. However, most people are familiar with the many benefits of factoring.

What Do I Tell New Customers?

As with existing customers, prospective and new customers will have little interest in how you finance your business. But you will need to advise new customers how and to whom your sales invoices are to be paid, which you would do if you weren’t using a factoring service.

Related: 10 Considerations When Selecting the Best Factoring Company for Your Business

Do I Need to Modify My Sales Invoices?

Your sales invoices will need modification to show the factoring company’s payment details. You will also need to have a formal assignment notice in your invoices, which explains that ownership of the invoice has been passed to the factoring company. You will also need to ensure that payment terms are displayed on each invoice. Other than that, your sales invoices layout can remain as it is now.

Will I Lose Control of My Business?

One of the myths about invoicing factoring is that a business somehow loses control of its relationship with customers. However, you are still firmly in the driving seat when you factor your invoices.

If you opt for a complete AR management factoring service, a representative of the factoring company will make collection calls if necessary. Even so, the best factoring companies do not employ heavy-handed collection techniques. And they liaise with you before escalating collections.

Other than managing your accounts receivable, your factoring company will have no contact with your customers. So, you retain complete control over managing customer relationships.

Do I Need to Factor All My Accounts Receivable?

Most factoring companies do not require you to factor all your sales invoices.

Suppose you have a customer that always pays their invoices with seven days, for example. In that case, it may not be cost-effective to finance that customer’s sales invoices. Factoring invoices for payment in advance or deposits would also not be necessary. However, if you have high volumes of sales invoices, you might find the administration simpler if you factor most invoices.

What Happens if a Customer Doesn’t Pay?

What happens if a customer fails to pay an invoice will depend on the type of factoring agreement? If you have a non-recourse agreement, the factoring company will bear the bad debt in most cases. If you have a recourse factoring management, you must repay the factoring company any invoices financed but not settled.

What Happens If a Factored Customer Sends a Payment to Me?

If a factored customer sends a payment to you, you must forward that payment to your factoring company. If you don’t, the debt will remain outstanding with the factor. So, you will incur additional fees on the overdue invoices.

This scenario may occur when you first switch over to factoring. And new customers may initially set up your accounts payable account with the incorrect payment details. But a straightforward phone call or letter to the customer should prevent future payments from being sent to the wrong place again.

Related: How to Switch Factoring Companies

Who Makes the Collection Calls?

The factoring company will generally make collection calls. However, if an account needs escalating, your factoring provider should contact you before taking further action.

When you factor sales invoices, you assign the invoices, not the customer relationship. So, no drastic action will be taken without your knowledge. And, if you so wish, you can buy back an overdue invoice and deal with the problem in-house.

Communication is crucial when you are dealing with a factoring company. So, if you want to deal with the collection of an overdue AR account, talk to your factoring provider. It is best to avoid a situation where you and your factoring company are both making collection calls because that will annoy customers.

Who Handles Invoice Disputes?

If a customer disputes a sales invoice, the factoring company will refer the issue to you. Then, it will be up to you to resolve the issue or issue a credit note. The invoice will usually remain financed by the factoring company for a while so that you can address the problem. But, if the invoice remains unpaid for a long time, your factoring company will ask for a repayment.

The Bottom Line

The only action your customers must take when you switch to factoring is to amend the payment details on their accounts payable system. So, the impact on customers is minimal. And you retain control over the relationship you have with your customers.

However, communication is crucial to ensure that the changeover to factoring and the ongoing operation of the account runs smoothly. So, it is advisable to choose a factoring company you feel you can work with and trust.

Your Questions Answered Quickly

Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay, Universal Funding can help your growing company. Call us at 800.405.6035 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.

About Universal Funding

Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.