The short answer is no. It’s not uncommon for companies to want to factor their problem customer accounts. The obvious logic is that if you can shift the credit risk to another business why not do it? The fact of the matter is that factoring companies are good at analyzing credit and they would probably catch invoices from problem customers before buying them anyways. And if they bough it, it would end up being a very expensive proposition for the client because factoring fees increase over time so the longer a customer takes to pay the more expensive it is for you. To add to it, many factoring contracts have a clause that requires a client to purchase invoices that are not paid within 90 days (this varies). So to sum it up, selling invoices from problem customers to a factoring company is always a bad idea.
If you have a problem customer, your best bet is to speak to an attorney or an expert in collections. However, if you are an invoice factoring client you should leverage your factoring company’s credit expertise and ask them to help you review the credit quality of your customer portfolio. A good factoring company will review your portfolio with you and help you flag customers that are collections problems or that could turn into collection problems soon. This helps you minimize the chances of selling to problem customers in the first place which is the best way to avoid collections problems.
A factoring company can also help you with the cash flow problems that are created by good customers that pay slowly. It’s common for companies to be paid on net 30 to net 60 days. Many small businesses can’t afford to wait that long for payment. They have many immediate obligations to meet supplier payments, rent and payroll and few reserves to cover such expenses. In this case, a factoring company can advance funds against your slow paying invoices from good customers, providing you with the liquidity you need to pay expenses and go after new opportunities. One big advantage of factoring is that it’s easier and faster to obtain than other solutions. Because of this, factoring has been gaining popularity in recent years as an ideal solution for small and midsized companies.
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