Jan 28
2012Invoice Factoring and the Legal Environment in 2012
Filed Under (business structure) by admin on 28-01-2012
Invoice factoring is the process of selling your invoices or accounts receivable to a buyer at a discount from the invoice amount. The buyer may provide payment for the invoices up front or pay a large percentage of what they collect to the invoice seller. Invoices are a source of incoming cash for a business. Selling slow paying invoices to invoice factoring firms allows a business to meet income targets by year’s end. If the business is going through Chapter 11 bankruptcy, selling long past due invoices to third parties for collection raises funds to pay lenders and demonstrate to the courts that the business is trying to pay its creditors.
Because an invoice is considered an asset by bankruptcy courts, sales of invoices must be properly documented and reported in bankruptcy. Using invoice factoring to seek payment for outstanding bills can demonstrate that a business going through bankruptcy is attempting to improve its cash flow or raise funds to pay its debtors. Invoice factoring and the sale of invoices through a chain of collectors have raised the specter of fraud. A call arrives with a demand that the business pay an invoice that the caller has upon their desk. The business owner is afraid that his or her personal credit will be tarnished or the business will be sued, so they pay the discounted invoice. Unfortunately, they just paid a scammer to continue harassing innocent parties.
The Fair Debt Collection Practices Act (FDCPA) has been found in court to apply to businesses as well as individuals. Businesses receiving solicitations for payments of invoices have the right to demand proof that the debt is owed to the invoice factoring firm. Invoice factoring has spread beyond commercial product buyers and sellers and into other businesses like legal firms and medical service providers. However, invoice factoring for services becomes more complicated than collections for invoices secured by assets such as the inventory bought with the invoice. Invoices may need to be free of liens before invoice factoring can be considered for invoice factoring. If their liens against the invoice, whether for other unpaid debts or by the original equipment manufacturer who provided equipment the firm sold to their own customers, factoring firms have the right to refuse to buy the invoice.
Invoices do not have to be paid by the customer if they have filed third party claims or in the process of filing third party court claims for defective products, dangerous defects or shoddy work. Invoices also do not have to be paid if the company holding the invoice did not pay its own contractors or suppliers. For example, you cannot sell the invoice for collections if your business did not pay its own suppliers and services. And a doctor being sued for malpractice cannot use invoice factoring to force patients to pay their bills. When invoices are sold, the invoice factoring contract must state if the debt is sold with or without recourse. If the invoice factoring is done without recourse, this does not mean the debtor is not liable for paying its debts if it cannot pay right now. Court cases have found that without recourse only means the invoice cannot be collected upon if the business has gone bankrupt and is going under. Slow payers are still required to pay their debts, whether held by the original invoicing firm or the company that bought the factored invoice. Using invoice factoring in 2012 allows the business to determine their losses for that tax year to write off their taxes. Invoice factoring, when the invoices are sold without recourse, simplify book keeping by moving the outstanding invoices off the books and replacing it with a set income from the third party invoice purchaser. If the invoice factoring firm is paid a percentage of their collections instead of sold the invoice outright, the amount paid is treated as a business expense.

