Company invoice companies do not require their clients to pledge collateral other than their receivables. Because of this, it is critical for the factor to feel very confident that they will be “repaid” by the customer’s customer. Progress invoices, which are typically present in construction conditions, are usually incompatible with billing invoices.
First, it is important to understand the mechanisms of factoring. Here are some of the most important concepts to know:
- The client must produce goods or services that they sell to another company
- Customer must be creditworthy (they pay consistently on time)
- Receivables must be effortless. This means that no lending institution, government agency, company or person can have a mortgage loan against the receivables. To establish a factoring scheme, the mortgage must be turned off so that the factoring company can have a first position on the collateral
- Non-current receivables or contracts cannot be recognized. When an invoice is not paid after 90 days, most factoring companies expect the client to replace that invoice with a new one
- The factory company must be able to verify the invoice correctly and that it will be paid by communicating with the customer
- Payments on the invoices must be paid to a lock box controlled by the factoring company
- The goods or services relating to the invoice must be complete
It is the last item that deserves attention, especially with construction fabrication or other situations where payments on a contract are made during the term. Progress billing is present when there is typically a long-term project with a final result. An example might be a contractor building a water tower for a city. Since the finished product will not be finished for a while, the city allows the designer to bill them in monthly installments. But there has not been a milestone.
In other words, even if the contractor makes progress on the project, the city will not be satisfied until the water tower is completely completed. In this situation, factoring companies are bestowed on advances on billing funds. If for some reason the contractor decided to step down from the job, the city would consider the company as a breach of contract and likely withhold payment.
On the other hand, if the project contained milestones representing the execution of parts of the contract, the client is likely to be able to make invoices. Let’s say the project involves the construction of various statues in city parks. The city allows the contractor to bill them each time a statue is completed. This invoice would be “billable” as a milestone has been set.
Although the issue of progress billing against milestones is often present in the construction industry, this may also apply to other segments. Another example might be a marketing company developing advertisements for a larger network. The company invoices the network periodically until the advertising is completed. Are these progress invoices or are milestones indicated?
These issues can often be resolved by incorporating a particular language into the contract that creates milestones. Remember that the factoring company simply needs to have a comfort level that they will be paid by the debtor.