Why Factoring Companies Verify Invoices
If you are a business owner who needs to improve your cash flow, you may have considered invoice factoring as a business funding option. With invoice factoring, a factoring company agrees to purchase your unpaid accounts receivable and pays you a percentage of the invoice value upfront. Instead of waiting for your customer to pay you, you accelerate your cash flow and have the funds to cover expenses, meet the seasonal demands of your industry, grow your business, or pursue other opportunities.
Before you can receive an advance, the factoring company will need to verify your invoices. In this article, we discuss the importance of invoice verification, the methods it is done by, and what you can do to make the process easier.
The Importance of Invoice Verification
The invoice issued to your customer is the primary document that confirms a transaction has occurred between you and your customer. It is also the primary document in the funding transaction between your company and the factoring company that you work with.
Because the factor is buying the accounts receivable underlying your invoice, the factor will need to verify that the invoice is valid, complete, and accepted by your customer. It is part of the ongoing due diligence that factoring companies rely on to ensure that they are buying valid and authentic invoices from their clients.
Invoice verification is an important step in the factoring process that is essential to protecting the factoring company so that your invoices can be factored quickly and efficiently without interrupting your cash flow.
It is one of the most important points of contact between your customer and the factoring company and must be handled properly. Sometimes your customer may not agree to participate with factoring or the verification process. If invoices are not able to be verified, the factoring process will not be completed.
Invoice verification provides assurance to your factor on a number of key aspects of the transaction, including:
Invoice verification helps prevent fraud by identifying false invoices, duplicate invoices, and pre-invoicing, disputed invoices, and misstated invoices. Some businesses may create invoices to non-existent customers or inflate invoice values to get more money from a factor. Other times, a business may invoice their customer before delivering the goods or services in order to get an advance sooner.
The factoring company will confirm that the goods or services have been delivered to and accepted by the customer. By doing so, the factoring company can prevent fraud and protect their own interests.
Risk of Nonpayment
Verification helps to eliminate the risk of non-payment. The factoring company will verify that the customer is a legitimate business with a good payment history. This may also include checking the customer’s credit history to ensure that payment will be made according to the terms.
Identifies Performance Issues
Invoice verification helps to identify performance issues that may give rise to a dispute and delay payment to the factoring company. Goods or services rendered that do not meet the customer’s quality requirements are common sources of disputes that can result in a chargeback or unauthorized deduction, and delay payment of the invoice.
Identifies Invoice Errors
Invoice verification also checks for invoice errors. Even simple errors can delay the payment of an invoice. Incorrect pricing, quantities that don’t match the purchase order, and incorrect customer name or address are a few examples of invoice errors that can delay invoice payments.
Confirms Completeness and Accuracy of the Invoice
Missing information, e.g., payment terms, mathematical errors in extensions of price and quantity, addition, and subtraction (discounts), are simple mistakes that can delay invoice payments and interrupt your cash flow.
Invoice verification is particularly important for non-recourse factoring companies. A non-recourse factoring company will assume the credit risk of non-payment associated with the transaction so they need to be certain that the invoice is valid and payment will be made in accordance with payment terms.
Confirms the Factoring Company Will Be Paid Directly
When an invoice is verified, one of main objectives for the factor company is to confirm funds will be sent directly to them from the client’s customer (account debtor) once the invoice is ready for payment. This also helps to reduce fraud, mitigate the risk of nonpayment, and prevents the client from potentially being double paid on the invoice.
How Factoring Companies Verify Invoices
Factoring companies use a number of methods to verify invoices, including:
Online Vendor Portal
Some companies provide an online vendor portal that allows suppliers to track the status of their invoices. Factoring companies use vendor portals to quickly verify invoices, adjust remittance instructions, accelerate funding, and keep the factoring transaction seamless.
A verification letter, also known as an “estoppel letter,” is sent by the factoring company to your customer as a way to verify an invoice. It provides assurances from your customer to the factor with regard to the invoices being factored. Your customer confirms that payment will be made on the accounts receivable without set-off, counter-claims, or other defenses. In order to be enforceable, the estoppel letter must contain certain clauses and be signed by your customer then returned directly to the factoring company. In the absence of a valid estoppel letter, it may be very difficult to obtain payment from a customer.
Dependent upon the structure of the factoring transaction, invoice verification can sometimes be performed via email with an account debtor. However, this is not typical and may potentially add risk to the transaction.
What You Can do to Make The Invoice Verification Process Easier
Making the invoice verification process as easy as possible will benefit you, your customer, and the factor you work with. There are a number of things that can be done to make the invoice verification process easier such as:
- Inform your customers: First and foremost, inform your customers that you are working with a factoring company and may be contacted to verify invoicing. Request that they cooperate with the factor and respond to their inquiries in a timely manner. They are an important party to the factoring process and should not be caught off guard when a representative from the factoring company reaches out to them.
- Provide accurate and complete invoices: Present invoicing that is accurate and complete for work that has been completed and accepted by your customer. Invoices should have the proper amount, invoice number, payment terms, and description of goods/ services rendered. Consider automating your invoicing process. Automated invoicing will significantly reduce invoice errors and improve the accuracy and completeness of your invoices. You will benefit from accelerating the speed of the transaction cycle and the corresponding acceleration in cash flow.
- Provide quality products or services: As a business owner, you must ensure you are providing goods or services in accordance with the terms of the contract with your customer. You should complete a project to their specifications and provide any documentation that they require. Issues or disputes the customer may have should be resolved as soon as possible.
How Capstone Can Help
Invoice verification is necessary to ensure that your invoices are valid, error-free, and complete. Seamless invoice verification expedites the funding of your invoices and ensures uninterrupted cash flow.
Invoice verification requires some finessing and that’s why it becomes important to work with an experienced factoring company, such as Capstone, who will work with you and your customer to ensure the invoice verification process is handled professionally and efficiently every step of the way. By doing so, you can improve your cash flow, your customer relationship, and your factoring experience.
Capstone is a leading commercial finance company that is focused on providing businesses with sufficient access to working capital. Contact us at (347) 414-9078 to learn how we can help your business succeed.