No, an invoice cannot be factored before you have delivered goods or services to your customer.
The question of pre invoicing when factoring comes up a number of times, this precess is sometimes used by business to enhance cash flow.
Lenders disapprove of this process and is not considered good practice as by definition, invoice factoring requires an invoice as collateral.
What can’t pre-delivery invoices be financed?
A pre delivery invoice cannot be financed by a factoring company as they purchase the invoice in good faith that you have provided the goods or services. If these goods or services have not been delivered than the invoice is worthless.
This situation could also be risky from the factor’s perspective because there is the potential for non-delivery. Imagine what would happen if the factor advances money to your business and, for some unexpected reason, your company is unable to deliver the goods/services to your client. The invoice would no longer be valid, which would create complex problems for both companies and could have important repercussions.
The definition of pre invoicing is any invoice which is raised before delivery of goods or completion of service and then assigned to a factoring company for an advance of monies.
A possible solution to this problem maybe you can work with your customer to allow you to invoice in stages. This way, you can invoice for product or work that has been delivered up to a specific point. With this approach, you create an invoice that can usually be factored.
As you can see, this strategy requires your customer to agree to a new billing schedule, which can be difficult if the project has already started. Ideally, you want to try to forecast your cash flow needs and negotiate a payment schedule before the project starts.
Factoring company concerns
Pre-invoicing regardless of the reason courses concern for factoring companies. This is a breach of the Factoring or Discounting Agreement and could be regarded as fraudulent.
Fresh air invoice fraud
Fresh air invoicing fraud happens when a company has issued an invoice to a customer and then draws monies from the factoring company under the terms of the Invoice factoring agreement prior to the delivery of the goods or services.
This is done with the knowledge that the company has not fully completed all or part of its contractual obligations to the customer.
Alternatively, invoices can be issued fraudulently, purely to raise finance from a factoring company when there is no underlying transaction or value attached to it and no real debt exists that is capable of being validly assigned.
However, it isn’t just factoring companies which can suffer from abuses of invoice practices.