Unpaid invoices aren’t just a hassle for most small business — they can significantly derail your cash flow, to the point you have trouble making investments, compensating employees, or paying your own bills. What seems like a minor headache of harassing a customer or client into payment could turn into a major business roadblock.
Your first inclination might be to sue a recalcitrant customer or send the bill to collections. But you might have another option. You might be able to sell that unpaid invoice, avoiding both litigation and a disruption in your cash flow.
As with any kind of debt, there are financial organizations willing to purchase unpaid invoices. The practice is called “factoring” and involves a “factor” paying a cash advance to a company for the right to collect on money owed to that company. So, not only is selling unpaid invoices legal, some date the practice to the ancient Mesopotamians. Still, while this provides the company with much needed cash, there are a couple important aspects of such an arrangement to consider.
First, factoring is only available for businesses or commercial clients who owe you the money — not for individual debtors. Second, most factors will only purchase current and outstanding invoices that are less than 90 days old. And, finally, remember that with invoice factoring you are basically receiving a cash advance — often around 80 percent of the total bill receivable — and, as the borrower, you’re on the hook for the interest and fees on the advance.
Factoring your unpaid invoices isn’t always the best option. Polite follow-ups, offers of discounts or threats of penalties, and even a more personal appeal might be just as, if not more, effective ways of getting paid. And if those don’t work, getting lawyers involved in demand letters, mediation or arbitration, and, finally, litigation, may be your last resort.
To find out which option works best for your small business, contact an experienced small business attorney in your area.