Updated: 8th January 2020
Published: 22nd April 2015
Factoring can be a useful financing tool for businesses and a way to get cash in quickly without having to take out a loan or extend your overdraft. However, if an invoice is in dispute and the factoring company won’t release funds, this can very quickly impact on your cash flow and cause you problems.
It depends on what type of contract you have with your factoring company as to what action you can take when an invoice is in dispute. There are two types of factoring agreements – recourse and non-recourse agreements. If your factor won’t release money to you because of a disputed invoice, then it is likely that you have a recourse contract, which tend to be more common. Under this type of agreement, the company will receive a higher percentage of each invoice, but will take the risk if there is a problem with payment. The factoring company will go to great lengths to recover the money from your client, but the risk of them not paying still lies with your company.
In this instance, you will need to speak to your customer to understand why they haven't paid. If they are unhappy with the goods or service they've received or they've not received a complete order then they may withhold payment until the issue is resolved. Try to get the issue resolved as soon as possible so that funds can be released to you.
With a non-recourse agreement, the factoring company will offer you bad debt protection and the factor will take on the risk of an invoice not being paid. This peace of mind of knowing that funds will be released to you, even if there is a problem with a client paying an invoice, comes at a higher price and under a non-recourse agreement the company will usually receive a lower percentage of each invoice or have a higher monthly charge. Check your contract to see which type of agreement you have with your factoring company.
Assuming that you have a recourse factoring contract, if the factor has already released part-payment to your business, then the money they’ve released to you will either have to be paid back to the factor or they may agree to claw back the amount from future invoices. The factor will then pass the disputed invoice back to your company for you to deal with.
Factoring works very well for many companies, but if your company is struggling with huge cash flow problems as a result of non-payment of invoices, then you will need to seek advice from your accountant or an insolvency practitioner. With 78 offices stretching from Inverness down to Exeter, Real Business Rescue can offer unparalleled director advice across the UK.