Invoice factoring companies do not require their clients to promise collateral other than their accounts receivable. Because of this, it is critical that the factor feel extremely confident that the customer’s customer will “give them back.” Progress invoices, which are generally present in building relationships, are generally not supported by accounts receivable factoring.

First, it is important to understand the mechanics of factoring. These are some of the most important concepts to know:

• The customer must produce goods or services that he sells to another company.
• Customer must be credible (consistently pays in a timely manner)
• Accounts receivable must be free of liens. This means that no credit institution, government agency, company, or person can have a bond against accounts receivable. To establish a factoring agreement, the lien must be extinguished so that the factoring company can have a first position on the guarantee.
• Accounts receivable or long-term contracts cannot be factored. When an invoice is not paid after 90 days, most factoring companies expect the customer to replace that invoice with a new one.
• The factoring company must be able to verify that the invoice is correct and that it will be paid by contacting the customer.
• Invoice payments must be paid in a safe deposit box controlled by the factoring company.
• The goods or services related to the invoice must be complete.

It is the last item that deserves attention, especially with construction factoring or other situations where payments on a contract are made throughout the term. Progress billing is present when there is typically a long-term project with a final result. An example could be a contractor who is building a water tower for a city. Since the finished product will not be completed for quite some time, the city allows the contractor to bill them in monthly installments. But there has not been a milestone.

In other words, even if the contractor is moving forward on the project, the city will not be satisfied until the water tower is fully completed. In this situation, factoring companies are wary of advancing funds in billing. If for some reason the contractor decided to abandon the job, the city would consider the company to be in breach of the contract and would likely withhold payment.

On the other hand, if the project contained milestones, representing the completion of parts of the contract, the customer will likely be able to factor the invoices. Let’s say the project involves the construction of several statues in city parks. The city allows the contractor to bill them each time a statue is completed. This invoice would be “factorable” as a milestone has been set.

Although the issue of billing progress versus milestones is most commonly present in the construction industry, it can apply to other segments as well. Another example could be a marketing company that develops ads for a major network. The company bills the network periodically until the commercial is completed. Are these billing advancements or have milestones been set?

These problems can often be solved by incorporating certain language into the contract that establishes milestones. Remember, the factoring company simply needs to have a level of assurance that the debtor will pay you.