What Are the Benefits and Risks of Invoice Factoring?

 Posted on February 07, 2020 in Finance Company Collections

Business owners are often receptive to creative ways that they can secure loans from financing companies. Invoice factoring, also known as accounts receivable factoring, is an alternative form of funding that has grown in popularity. Factoring is a collateral-backed loan, with the collateral being the business’s unpaid customer invoices. The lender purchases the invoices and receives payments from the borrower’s customers in order to be reimbursed for the loan. While there are benefits to using factoring to create a loan agreement, creditors should also understand the risks that may be involved.

Benefits

Factoring gives creditors more flexibility when working with a business client that does not have a strong credit history. From the borrower’s perspective, they are quickly turning their invoices into cash that they can use for immediate expenses. From the lender’s perspective, they are purchasing current customer invoices and could be repaid for the loan in a matter of months, depending on when the invoices are due. If the process goes smoothly, the creditor will have created a successful business relationship with a client that may not have qualified for a loan otherwise.

Risks

There is potential for a factoring loan agreement to go wrong, leaving the borrower unable to repay the loan. Most of the risks stem from the fact that the lender must collect money from the borrower’s customers, who may not cooperate for several reasons:

1. Credit Risk: The lender is not purchasing invoices for customers who are past due on their payment, but there is still the risk that customers will not pay for the current invoices when they are due. The lender may need to vet the credit history of the borrower’s customers to determine whether the invoices are risky.
2. Distrust: The borrower’s customers may be unsure about whether they can trust paying the invoice to the lender instead of the business itself. If the lender behaves like a debt collector, it may upset the customers because they are not overdue with their payments.
3. Business-Customer Relationship: The lender may be unable to collect on an invoice because of a dispute between the borrower and its customer. For instance, the customer may refuse to pay the invoice if they have not received the promised goods from the business or were unsatisfied with the service.

Contact a Chicago Creditor’s Rights Attorney

When you lend money to a client, there is always a risk that they will not pay you back. If that happens, you need the help of an Illinois debt collection lawyer at Dimand Walinski Law Offices, P.C. Call 312-704-0771 to schedule a consultation.

Source:

https://www.behalf.com/merchants/factoring/invoice-factoring-problems/