The Legal Aspects of Invoice Purchase: What to Watch Out For

Invoice purchasing, also known as accounts receivable financing, can be a valuable tool for businesses. It allows companies to access immediate cash flow by selling outstanding invoices to a financing company at a discount. While it offers a fast solution, there are legal aspects to consider before diving in. Understanding these potential pitfalls can help businesses navigate invoice purchases more effectively and minimize risk.

Who Uses Invoice Purchasing?

Invoice purchasing is often used by businesses with slow-paying customers or those experiencing temporary cash flow shortages. It’s particularly attractive to startups and small businesses that might not have established credit lines with traditional lenders.

Key Legal Considerations:

1. Understanding the Agreement: Invoice purchase agreements can vary significantly. It’s crucial to thoroughly review the terms with a lawyer before signing. Here are some key points to focus on:

• Recourse vs. Non-Recourse:

  • Recourse: If the customer fails to pay the invoice, the business selling the invoice (seller) may be responsible for repurchasing it from the financing company (funder). This incentivizes the seller to ensure the validity of the invoice and the customer’s creditworthiness.
  • Non-Recourse: The seller has no liability if the customer defaults. This typically comes at a higher discount rate for the seller.

• Discount Rate: This is the fee you pay the funder for purchasing the invoice. It reflects the risk the funder takes in assuming the customer’s payment responsibility. Negotiate a fair rate based on your industry standards and invoice quality.

• Early Payment Discounts: Some agreements may allow the seller to offer their customer a discount for early payment. This recovered amount is then shared between the seller and the funder according to the agreement.

• Warranties and Representations: The seller typically warrants that the invoice is genuine, the goods or services have been delivered, and the customer is obligated to pay.

2. Know Your Customer: Before selling an invoice, assess the customer’s creditworthiness. A history of late payments or defaults increases the risk of the invoice remaining unpaid, potentially putting the burden back on you (in recourse agreements).

3. Perfecting Your Security Interest: In some jurisdictions, the seller may need to file a financing statement to secure their rights in the invoice. This helps protect the seller’s claim if the customer files for bankruptcy.

4. Existing Liens: Ensure the invoice isn’t already assigned to another creditor. Priority disputes can arise if there are competing claims on the receivable.

5. Tax Implications: Invoice purchases can have tax consequences. Consult your accountant to understand the impact on your business taxes.

6. State Regulations: Invoice purchasing may be subject to specific regulations depending on your location. Research any local licensing or disclosure requirements that might apply.

Additional Tips:

• Develop a Strong Relationship with the Funder: Building trust and transparency with the funder can lead to better terms and a smoother experience.Factoring

• Maintain Clear Records: Keep detailed records of all invoice purchases, including the original invoice, the purchase agreement, and any communication with the customer and the funder.

• Consider Alternatives: Invoice purchasing isn’t always the most cost-effective solution. Explore other options like business loans, lines of credit, or improving your accounts receivable management practices.

Conclusion

Invoice purchasing can be a helpful tool, but it’s not without legal considerations. By carefully reviewing agreements, understanding the risks involved, and seeking professional advice when necessary, businesses can leverage invoice purchases effectively to manage cash flow and achieve their financial goals.