Invoice factoring is a great way for a business to generate working capital, especially if they don't qualify for a a bank line of credit.  Although there is less paperwork and an account is easier to set up than traditional financing, factors are very vehement about verifying the validity of invoices.

In a typical accounts receivable factoring relationship,  the only collateral required is a pledge of the company's receivables.  These are amounts due from customers on goods sold or services performed.  Depending on several factors, such as the type of industry the client participates in, the credit-worthiness of its customers,  and the reliability of the firm's billing and collections system, the advance rate on invoices submitted to the factoring company can range from 65% to 85%.  The remaining amount is called the reserve and offers a cushion to the factor. 

Why factoring companies verify invoices
Since the factoring company's security is directly tied to the amounts billed on credit, they will frequently contact the customers directly to verify the invoices.  They will not only verify the invoice totals, but equally as important, make sure the customer is satisfied both in terms of completeness and quality.  Many businesses request factoring for a product or service that has yet to be provided in order to bolster their cash flow.  Even though they have invoiced the customer, the work won't be done until later and the client needs to bolster their cash flow.   A company with this scenario isn't a candidate for factoring because the customer can demand their money back if the service isn't performed.  This is called pre-billing.  Another situation that doesn't fall into the model of factoring is progress billing.  This usually relates to a construction project in which the company bills the customer on a periodic  basis until the project is completed.  Because there is no milestone of completion, the factoring company is unable to advance funds on the invoice.   To do so would greatly magnify the risk to the factor.

Another issue is related to the warranty directly tied to the sale. If the customer is not happy with the goods or services sold,  performance is called into question and there may be offsets against the invoice.  In other words, not only do factoring companies require the work to be completed, they also seek to verify the satisfaction of the customer. Ongoing problems of this nature will likely result in a termination of funding.

Factoring can greatly improve the cash flow of an organization, but business owners and decision makers must understand the position of the factoring company they are working with.   There will not likely be a problem if the goods or services sold are of good quality and credit is extended wisely.