Five Potential Barriers to a Successful Factoring Transaction

Accounts receivable factoring is a simple and quick method for temp nurse staffing agencies, medical transcription services and medical coding companies to access working capital. However, certain requirements must be satisfied to take full advantage of factoring’s many benefits.

Sales must be final. The only way a company can factor an invoice is if the sale is final: the company provided a service (i.e. a medical staffing agency sent temporary nurses to work in ABC hospital) or a good (i.e. a medical supply company sold latex gloves to a doctor’s office), and the customer unequivocally accepted it.

Goods or services must be invoiced after they are received. Some companies bill their customers before providing goods or services. This type of relationship is unacceptable in a factoring transaction.

There can’t be any set-offs or charge-backs. Some company/customer relationships allow for set-offs, in which invoice deductions are made based on the receipt of goods and/or services over the amount due on the invoice. Similiar to set-offs, charge-backs give a customer the right to deduct payment if goods are incorrect, faulty or damaged. Both of these practices affect the final invoice amount. While set-offs and charge-backs are common in many industries, they cannot exist when a factoring company is involved because factoring firms purchase the invoice in full.

Liens and lawsuits against a company complicates a factoring transaction. Liens and lawsuits affect a company’s welfare. In some cases, it’s possible for an accounts receivable factoring firm to work with a lien-holder to resolve difficulty. Lawsuits, on the other hand, could raise a number of issues, and need to be addressed on an individual basis.

Prospective factoring clients need to be approved during a due diligence process. Most factoring companies will conduct a thorough review before a factoring relationship can be established with a medical staffing agency, medical transcription service or a medical coding company. While a factor’s decision relates to the creditworthiness of a company’s customers, it’s important for accounts receivable factoring firms to understand and evaluate its client’s history, operations and prospects. Full disclosure and open dialogue are the most efficient and effective means to a positive factoring relationship.

Click here to see a step-by-step factoring diagram.

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