Looking for advice on this situation. Factoring Company Collecting From My Client After I Repaid the Advance Any guidance would be greatly appreciated.
Details: I'm in a situation where I need to understand my legal options. Has anyone dealt with something similar?
For anyone in this situation: don't rely on a single payment processor. Always have a backup processor ready to go. Diversification isn't just for investments.
Keep in mind that payment processor disputes are governed by the contract you signed, not consumer protection law (since you're a merchant). Read your merchant agreement carefully for the dispute resolution process.
File a complaint with the CFPB immediately. Payment processors and banks respond much faster to regulatory complaints than to customer service tickets. I've seen $20K holds released within a week after a CFPB complaint.
File a complaint with the CFPB immediately. Payment processors and banks respond much faster to regulatory complaints than to customer service tickets. I've seen $20K holds released within a week after a CFPB complaint.
File a complaint with the CFPB immediately. Payment processors and banks respond much faster to regulatory complaints than to customer service tickets. I've seen $20K holds released within a week after a CFPB complaint.
For anyone in this situation: don't rely on a single payment processor. Always have a backup processor ready to go. Diversification isn't just for investments.
Update: Thanks everyone for the guidance. I consulted with an attorney and we're moving forward. The advice here helped me understand what questions to ask and what to expect. Will update when there's a resolution.
I used invoice factoring once and it was a nightmare. The factoring company bought my $15K invoice at 85%, then when my client disputed the work (a legitimate scope disagreement we could have resolved), the factoring company came after ME for the full amount plus fees under the recourse clause.
Lessons learned: (1) Read the recourse vs. non-recourse terms carefully — recourse factoring means you're on the hook if the client doesn't pay, (2) the factoring company's aggressive collection tactics can damage your client relationships, (3) the effective interest rate when you calculate fees + discount is often 20-40% annualized.
Invoice factoring agreements are essentially secured transactions governed by UCC Article 9. A few important legal points:
Notice of assignment: Once your client is notified that the invoice has been assigned to the factor, they should pay the factor directly. If your client pays you instead after notice, the factor may have claims against both of you.
Recourse obligations: In a full recourse agreement, the factor can force you to buy back any invoice the debtor doesn't pay within the agreed timeframe. This is not just a risk — it's a near-certainty for disputed invoices.
If you're already in a dispute with the factor, check whether they complied with their own agreement terms. Factors sometimes fail to provide proper notice or exceed their contractual collection methods, which can give you defenses.
This thread is very relevant to me right now. We used invoice factoring for about 18 months and just exited the arrangement. A few things I learned the hard way that might help others:
The UCC filing is the big one. When you sign a factoring agreement, the factor files a UCC-1 financing statement against your business. This is a public lien on your receivables. Even after you repay or terminate the agreement, that UCC filing stays on record unless the factor files a termination statement. If they do not file it, it shows up when banks or other lenders run credit checks on your business and can block you from getting a line of credit or SBA loan.
Demand a UCC termination in writing as part of your exit. Do not assume they will do it automatically. In our case, the factor dragged their feet for 3 months after we paid off the final advance. I had to send a formal demand citing UCC Section 9-513, which requires the secured party to file a termination statement within 20 days of receiving an authenticated demand. They filed it within a week after that letter.
Client relationship damage is real. Two of our best clients told us they were uncomfortable receiving collection notices from the factoring company. One client actually withheld payment on a subsequent invoice because they were confused about who to pay. If you are in a relationship-driven business, think carefully about whether factoring is worth the risk to those relationships.
My recommendation for anyone considering factoring: explore SBA microloans or a business line of credit first. The effective cost of factoring (when you calculate the discount plus fees) was about 35 percent annualized for us. A business line of credit would have been 8-12 percent.