Protect your client relationships when invoice factoring
Factoring and client relationships
- When you sell an invoice to a factor, the factor collects payment from your clients.
- Invoice factoring is common in some industries, but companies may not want to disclose it to clients.
- You can arrange discreet client payment options, but transparency is best to ensure client trust.
- Select a factor that is reputable, experienced and understands your industry.
Your small business needs a rapid boost in cash flow. After comparing business loans with the alternative financing options of cash advances and invoice factoring, you’ve decided that invoice factoring is the best solution for your business. Will your clients, however, see it the same way?
As the invoice factoring company — also known as the factor — will directly contact your clients for payment, it is essential to choose a company experienced in your industry that will professionally manage your invoices and protect your client relationships.
Typically, when a company sells invoices to a factor, the factor assumes the responsibility of managing those invoices, including client communications about due dates and billing.
Factoring may be a necessary and wise financial decision for your business, but some companies don’t want their clients to know that their invoices were sold.
A client may not fully understand what it means to have their invoices sold or worry that your company is in turbulent financial waters. They may be concerned with getting harassed for payment by a third party, one they didn’t even do business with. These concerns could influence whether a client wants to continue to work with your company.
Businesses can be fully transparent or work with the factor for more discretion. The strategy to reduce risking client dissatisfaction depends on the factor, your industry and your clients.
Selecting a factor
Compare factors before deciding to work with one. In addition to the financial cost of invoice factoring, ensure the company will handle client communications in an efficient and professional manner.
- Reputation. Research reliable factors. The International Factoring Association requires members to adhere to a Code of Ethics. The association has a membership database that can be searched by location and industry. Ensure you are working directly with a factor and not a broker who will charge additional fees.
- Industry. Choose a factor that is familiar with your industry and how it operates. This experience brings higher success rates in collection, which depending on whether you have a recourse or nonrecourse arrangement, can affect your business. The factor may even have existing relationships with your clients. Industry experience is more important than the factor’s location.
- Time in business and references. Compare experience and track record. Just like any other service, you can ask for references, as well.
- Communication flexibility. Identify whether the factor is willing to accommodate how you want your clients approached for payment. Some factors — particularly those specializing in one industry — require direct communication with clients, while others — such as some online companies — forego it altogether. You might want an option somewhere in between, so it is important to discuss that up front.
Informing your clients
Once you have sold an invoice, either your business or the factor sends clients a Notice of Assignment explaining that the factor will receive future payments and the terms of the arrangement.
Invoice factoring is commonplace in certain industries. According to the International Factoring Association, 36.4 percent of the factoring business is in the transportation industry, 10.9 percent is in the service industry and 7.3 percent in construction. Your clients may be used to having their invoices sold. In this case, you might let the factor handle all communication.
If it is the first time you are selling a client’s invoice but you believe that client would be comfortable with the arrangement, it may be helpful to issue the Notice of Assignment yourself or call your client to explain the situation. They will likely feel more comfortable hearing from you first rather than simply receiving an unexpected letter from the factor.
Few invoice factoring companies take invoices without the client being informed. It is best to be transparent and notify clients you are using a factor. If a client finds out later they have been paying a third party that they believed was your company, you jeopardize their trust in your business. Another important point to remember is that the factor will run a credit check on the clients whose invoices it is purchasing. As this has the potential to affect the client’s credit score, you should inform them of your intention to factor.
If, however, you believe that invoice factoring could have a potentially negative impact on your client relationship but is a risk you are willing to take, you can work with the factor to create a more discreet system. One option is to have clients continue to make out their payments to your business, but have them sent to a lockbox the factor controls.
Another option is to establish a bank account in your business’ name and grant the factor control of its management. You can inform your clients that payments should be made to this new account. Some factors will make all communication on your behalf as representatives of your company. While this can be convenient, it is essential that you trust the factor to handle themselves in a professional and courteous manner in line with your brand, as your clients will not be aware that this is a third-party organization.
With both your finances and client relationships at stake, selecting an expert, reliable invoice factoring company — and being as transparent as possible with clients — is essential to making good use of this alternative financing mechanism.