Invoice financing, also known as “factoring”, is commonly used by companies to generate liquidity from B2B customers who pay on credit terms of 30, 60, or 90+ days. Factoring companies or “factors”, purchase your business’s invoice and provide you with an advance based on the invoice’s face value. When it comes time to pay for the invoice, your customer pays the factor, and the remaining invoice balance is made available to your business. Simply put, factors help businesses get paid faster by turning their unpaid invoices into cash flow.
While factoring is an easy solution for businesses to quickly access the capital they need, executing a successful partnership takes some care and preparation. To ensure the success of your factoring partnership, make an effort to involve your customer from the very beginning.
But before diving into how to introduce a factor, it’s important to note why they would reach out to your customers and when those interactions would occur.
Why Would a Factor Need to Reach Out to My Customers?
Contrary to popular belief, factoring companies have no intention of harassing your customers. In fact, most have guidelines to warrant their outreach and only do so when needed. Here are a few reasons why a factor would need to reach out to your customers:
Introduce the factoring relationship
A Letter of Introduction will be sent to your customers, notifying them that you’ve entered into a factoring relationship and that a representative from the factor will be contacting them shortly. This document typically includes your company letterhead, can be delivered by your business or the factor (optional), and is customized by each customer.
Update the remittance address of invoices
Your customers will be sent a Notice of Assignment, a document used by factoring companies to inform your customer that the accounts receivable have been assigned and instructs them on where to send future payments. This document, generated by the factor, is typically delivered to a customer following an initial introduction.
Confirm invoice details
Often, factoring companies will contact a customer to confirm the accuracy of invoice information or identify any discrepancies with delivered goods or services. This communication is commonly delivered by email and may occur before or after an invoice is purchased.
Confirm payment status
As invoices meet or exceed their credit terms, factoring companies will begin to contact customers to obtain the payment status of invoices. Typically, once the factor receives a payment status, no additional follow-up is needed. However, if a customer becomes unresponsive or delinquent, the factor may follow-up on more than one occasion to ensure the invoice gets paid.
How Do I Introduce a Factor to My Customers?
Staging a factor’s introduction can take many forms, and while there’s no industry standard for doing so, making it a fluid process for both your customer and the factor should be a top priority. With that said, here are a few best practices you can follow when introducing a factor:
Notify your customers early on
The earlier your customers are aware of your intentions to factor their invoices, the easier it will be for them to begin a relationship with a factor. A simple phone call or email to your customer — notifying them that a representative from the factor will be reaching out soon — can help expedite the onboarding process and save you from experiencing any disruptions in the future.
Provide Accurate Contact Information to the Factor
Since the factor will need to verify invoice quality and obtain payment status, the contact information you provide should be up-to-date and appropriate for outreach. Typically, this includes your day-to-day contact or someone in Accounts Payable who can verify invoices and provide payment status updates.
Common Misconceptions About Factoring and
Some businesses have a negative impression of factoring or factoring companies. This is often due to a lack of understanding about how a factor operates. To help clear the air, let’s address a few common misconceptions about factoring and customers:
Factoring gives a negative impression to your customers
Some people falsely believe that using factoring is a sign that your business is in trouble, but most companies choose to factor because it improves their cash flow and provides them with more flexibility than a line of credit. Helping your customers understand why you’re choosing to factor will not only improve how they view your business but also reassure them that you’re capable of delivering additional products or services.
Factors will harass your customers
Collecting past due invoices can sometimes lead to an unsettling conversation with your customer. With that in mind, most factors tend to limit their outreach and only do so when necessary. It’s common for a factor to only follow-up with a customer’s accounts payable department once an invoice has exceeded its due date by more than a week, which is usually addressed by a simple email or phone call. Factors have no intention of harassing your customers and will typically only reach out to your AP department unless they’re unsuccessful in obtaining a response.
LSQ helps businesses better manage their cash flow to make the most of whatever they’ve earned. Offering invoice financing and supply chain finance solutions, LSQ provides clients with a simple, secure, and honest funding experience. LSQ blends human insights with the analytical power of technology to develop products that give customers the means to accelerate the flow of business. LSQ, headquartered in Orlando, Florida, has helped 1,000s of companies access $25 billion in its 20+ years in business. Learn more about our solutions at www.lsq.com