One of the most frequent questions I get from new clients is how to tell customers about factoring, what is going to be required on the part of the customer and how the customer is going to react to their vendor using a factoring company.  

Quite simply, the only changes that a factoring program brings to the customer is (1) invoices are sent to the customer by the factoring company and (2) all payments that used to be sent to the vendor now need to be sent directly to the factoring company.  

First, it is important to understand why it is important to notify your customers about factoring.  

• Factoring companies are required to notify their client’s customers that the client has sold its accounts receivable to the factoring company and that the customer is legally obligated to pay the factoring company.  

• By discussing this notification with your customer, you minimize any surprises when the factoring company sends the notification to your customer.

• If you are in an industry where factoring is not widely used or understood, this gives you an opportunity to explain factoring and how factoring improves your cash flow, allowing you to continue to provide superior goods or services as your customer has come to expect (or to be able to accommodate larger orders, fill orders faster, etc). 

• Importantly, for the client, factoring fees are charged based on the length of time the invoice is outstanding; therefore, when the customer pays the factoring company directly, the payment is applied to the client’s account quicker.

The primary apprehension that many clients have in telling their customers that they are going to factor invoices is that their customers could become concerned that the client’s business is not doing well or is struggling. My suggestion is to simply explain that you are factoring invoices in order to improve your cash flow, grow your business, increase staff, etc. 

In my experience, most customers don’t even ask for an explanation unless it is an industry where factoring is not commonly used or understood.  

Here are a few recommendations on how to tell customers about factoring and to overcome any misperceptions associated with invoice factoring.  

1. Call your accounts payable representative and let them know that you are going to be factoring invoices.

2. Explain that they will be receiving invoices directly from the factoring company and that payments will need to be sent directly to the factoring company. 

Assure your customer that this is the only change to the business process.  You will continue to be the vendor, and you will continue to provide goods and services that meet their expectations. Honestly, this is really what the customer cares about.

3. Ask if the customer needs any specific forms completed for the change in payment direction to take place. 

If payments are made via ACH or wire, the client and/or factoring company will likely be required to fill out a form to change banking instructions.

4. Let your contact know that the factoring company is sending a notice of assignment.

5. Ask the customer to respond that they acknowledge the change in payment direction.

By following these few simple steps and being proactive in talking with your customers about your factoring program, you maintain a positive relationship with your customer and avoid any unnecessary surprise reactions from your customers.

Learn more about factoring and Fast A/R Funding’s services by downloading our informative “Factoring 101” guide, or call 888.833.2286 to speak with one of our small business finance consultants.