Maintenance
Part of Invoice financing decides eligibility by watching your customer, not you
How to test an invoice financier's treatment of your customers before you sign
Invoice financiers are collections partners too. How to test the way a financier treats your customers, how to count the fee, and the five definitions that decide the deal.
An invoice financier is three things at once, and most people shopping for one only evaluate the second. It is a collector, because it will be in contact with your customers. It is a lender, because it prices money. And it is a contract, because the document decides everything the first two do when things go wrong.
The honest answer to whether a financier treats your customers as well as you do is: not on its own, and never on its assurance. A financier that collects from your customers can cost you a customer, and the only way to judge whether it will is to test the collector role with evidence before you sign. What follows is how to judge each of the three roles, and how to read a quote so that two offers can be set beside each other honestly.
What to take away
- You are choosing a collections partner as much as a source of cash. Judge how a financier treats your debtors before you judge its price.
- Fees in this product are structural, not just numeric. Two quotes with the same headline can differ widely on how a period is counted and what sits outside it.
- The definitions decide the dealeligible invoice, dispute, period, recourse, termination.
The collector
Whatever arrangement you choose, the financier will at some point verify invoices with your customers. In a notified facility, it will collect from them. That is contact between a third party and the people who pay your bills.
Whether a notice to your customer binds them is decided by statute, not by your own contract. Article 9 of the Uniform Commercial Code governs assignments of accounts, and Section 9-406 provides that restrictions on the assignment of accounts are ineffective. A clause in a customer contract that bans assignment therefore does not stop a financier from collecting, which is why notified and confidential versions behave so differently.
Judge this role on evidence, not assurance.
- Ask to see the verification script and the notice of assignment, the letter your customers receive. Read both as your customer would.
- Ask how verification is doneevery invoice or a sample, by phone or by portal, and by whom.
- Ask what happens on a late invoiceat what point is your customer contacted, in what tone, and are you told first?
- Ask for a reference from a client in your sector whose customers resemble yours, and ask that client one question: has the financier ever cost you a customer?
- Ask how a dispute is handled and who speaks to your customer during it.
A fair verification script is short and factual. An illustrative example: "We are confirming invoice 1047 for $8,250, dated 2 October, and the expected payment date. Please reply to confirm." It states no arrears, asks for no bank details, and does not threaten. A script that does any of those things tells you how the collector will treat your customers.
A financier that handles this role well is worth a price premium, because a lost customer costs more than any fee. A financier that handles it badly is expensive at any price.
The lender
Pricing in this product is not a rate. It is a structure, and the structure has more moving parts than a term loan does. To compare two quotes, extract each of the following from both and set them side by side.
Element / What to pin down
- The advance
- What share of an invoice is paid up front, and how quickly after submission
- The reserve
- What is held back, and when and how it is released
- The per-period fee
- The rate, and above all how a period is counted: calendar days, weeks, part-weeks rounded up, or steps at intervals
- Fees outside the per-period fee
- Facility fee, service fee, minimum monthly charge, setup, credit checks, wire fees, charges on aged invoices
- The volume commitment
- Whether you must finance a minimum, and what the shortfall costs
- The term
- Minimum term, notice period, and what leaving costs
Then run each quote against your own collection history, using the days your customers really take rather than the terms you print. Do it twice, on an average customer and on your slowest. The method for turning all of this into one comparable figure per dollar advanced is in invoice financing.
The single element most often underweighted is how a period is counted. For example, a 1% per-week fee on a $10,000 invoice paid in 33 days costs $500 if every started week counts as a full week, and about $471 if the fee accrues daily. Both quotes can carry the same headline number. (Illustrative figures.)
The contract
Five definitions decide what the facility is, and none of them appears in the sales conversation.
Eligible invoice. The list of things that make an invoice ineligible: age, concentration, dispute, related party, pre-billing, assignment clauses. The longer the list, the smaller the facility really is. Invoice financing requirements sets out what to prepare so that more of your invoices qualify.
Dispute. What counts as one, when you must report it, and what happens to the advance while it runs. This is where a validity guarantee is most likely to be triggered.
Recourse. If described as non-recourse, exactly which events are covered. Usually a defined insolvency of your customer, rarely a refusal to pay.
Default. The events that let the financier stop advancing, demand repayment, or take over collection. Read for events that a normally-run business triggers by accident: a change of bank account, late reporting, a customer moving over the concentration limit.
Termination. The notice period, the minimum term, the run-off mechanics, and whether the UCC-1 financing statement filed over your receivables is terminated automatically or at your request. A UCC-1 is the form a creditor files, usually with the Secretary of State in the state where your business is organized, to record a security interest in your personal property. If it is never released, it stays of record, and it is yours to chase down later.
Ask for the full agreement before you decide, and read those five sections yourself before anyone summarizes them for you. The charges that live outside a headline fee, on any product, are set out in the annual cost of an offer.
Questions for a first call
- Do you finance businesses in my sector, with customers like mine, at my size, now?
- Is your facility notified or confidential, and what is the price difference?
- Factoring or discountingwill you collect, or will I?
- What share of my ledger will you take from a single customer?
- How is a period counted for the fee?
- What is the full list of charges outside the per-period fee?
- What most often goes wrong with facilities like mine?
Whoever you pick, the routine that follows is the same, and it is set out week by week in the invoice financing checklist.
Where to check anything specific
Pricing, eligibility and process belong to each provider and change without notice. The SBA's guidance on small business financing and the FDIC's Money Smart for Small Business are neutral places to start on financing generally. How the file you bring changes the conversation is covered in loans by credit profile.
Common questions
Why is the collector role first?
Because it is the one that can cost you something the facility can never repay. Money is replaceable; a long-standing customer is not.
Is a confidential facility always better for customer relationships?
Not necessarily. Many commercial customers regard receivables financing as ordinary. A confidential facility costs more and still involves some contact through verification. Decide based on your own customers.
Two quotes have the same fee rate. Are they the same price?
Almost certainly not. Check how a period is counted, what the minimums are, and what the reserve release looks like. Then run both against your real collection days.
What is the most important clause?
The definition of an eligible invoice. It sets the real size of the facility, and it is the clause most likely to be smaller than the conversation implied.
