4 Tests Before You Sell Your Invoices
Factoring a Business Idea

A business idea cannot be factored. Only a receivable owed by an actual customer can be sold, and the distance between those two things is where owners lose money.

Factoring appeals to a new company because it promises cash without debt. The promise holds only where completed work created an assignable invoice that a customer will pay. The OCC guidance on receivables financing treats the quality of the receivable as the foundation of the transaction, alongside the need for funds. An idea has no quality to assess. A delivered order does.

Confirm That a Receivable Exists

Begin with the customer obligation, not the funding application. Future work, forecasted orders, and accepted delivery sit at different points on the path to cash. Only the last one resembles an asset a factor can price. Gather the customer agreement, proof of delivery or acceptance, and the invoice before any conversation about rates. If the customer has not accepted the work, identify what remains outstanding. And do not confuse a willing buyer of invoices with a believer in the business plan. The factor underwrites the customer while the owner carries the plan alone.

Allocate the Risk of Nonpayment

Read the recourse provisions before the fee schedule. A recourse agreement can require the business to repurchase an unpaid invoice or substitute another one, which means the cash received was an advance against a promise the seller continues to carry. A nonrecourse label narrows the protection to defined causes, and the schedule of excluded causes ran to three pages in one agreement reviewed this spring, most of them devoted to fees. There are exceptions, though in practice they tend to confirm the rule. Ask how the contract treats a customer who claims the goods arrived incomplete, a customer who accepts the goods but cannot pay, and a customer who simply pays late. Each event needs its own answer in the text. Counsel should review and analyze any provision that leaves the answer to a later determination by the factor. We ensure clients understand which risks stay with the house before funds change hands.

Price the Cash Against the Wait

Compare the net proceeds with the cost of waiting for the customer to pay in the ordinary course. The factor retains a reserve, applies fees that may grow with time, and releases the remainder on terms the agreement defines. A short collection interval on a dependable customer presents one calculation. An uncertain date on a disputed invoice changes the arithmetic. The reconciliation clause functions the way a smoke detector functions in a building already scheduled for demolition: present, loud, and irrelevant to whether the structure survives. That peculiar comparison earns its place because owners keep treating financing as a cure for a sale that never closed. Simply model the next production cycle with the fees removed from available cash. If suppliers, labor, and delivery for the following order cannot be covered, the advance accelerates the schedule of the collapse it was meant to prevent.

Clear the Path Before Selling the Invoice

Identify who collects from the customer and who else claims the same receivable. Some agreements require the factor to give notice to customers and collect from them under the agreement, which alters relationships the business spent years building. A UCC filing search reveals prior claims without settling their validity. Where MCA withdrawals already consume incoming receipts, the factoring proceeds may disappear into old obligations before funding new work. Delancey Street offers a free confidential initial review of MCA debt pressure for eligible accounts. It is a debt settlement company, not a law firm and not a factoring provider, and legal questions go to independently licensed counsel. Place the proposed factoring terms beside the full debt load so the decision reflects the whole ledger. The contract decides who receives the reserve. Confirm the treatment of credits, offsets, and short payments before relying on any net figure.

Factoring serves a business whose sales are sound and whose customers pay slowly. A business selling invoices in order to survive the week buys acceleration of the collapse. The underlying transaction must earn the cash someone proposes to advance, and no financing structure changes that order of operations.