Invoice factoring allows you to sell your accounts receivables in exchange for immediate funds. To successfully use invoice factoring for your business, consider the following list of 12 common invoice factoring mistakes and how to avoid them:
Forgetting to send invoices
It is essential to ensure that you have sent an invoice to your customer for goods or services you’ve provided. Many businesses tend to make this mistake, especially when they’re busy. It is important to make invoicing a priority, so that you won’t forget. To put it simply: if you don’t send an invoice, you will not get paid. Sending invoices to your customers will remind them that they owe you money. It is also useful to keep a record of money owed to your business for tracking your payments. As well, it is important that you send invoices, and not just a purchase order, so the customer understands that they are being billed.
Not inquiring about the unpaid invoices
Collecting payments can be a tedious task. Customers may take weeks or even months to pay their invoices. Since payments can easily be forgotten, it is absolutely necessary to follow up. Inquiring about your unpaid invoice will prompt your customer to pay immediately. It is advised to follow up on the oldest unpaid invoices first. When you enter a factoring relationship, you should inquire about how the factoring company will handle your unpaid invoices.
Sending the invoice to the wrong company
Although this is rare, it does happen. Business owners might send their invoices to the wrong company unknowingly. The consequences of doing this can be detrimental to your business. It exposes confidential information to unauthorized individuals, which can create a potential legal risk depending on the industry you are in. This mistake can also cause your business to come off as irresponsible and unprofessional. Even if it may seem unlikely to occur, it helps to always double-check your invoices to make sure that they’re sent to the right company.
Hidden or unclear terms
Businesses have made the mistake of accepting a factoring agreement or contract with ambiguous and/or hidden terms. It is important to fully understand the terms stated within a contract as these terms will determine how the factoring company will manage your accounts receivables. However, many businesses that are new to invoice factoring can find the terms to be confusing and cannot comprehend the terminology used. Some factoring companies may even include hidden terms that can inflate the costs of factoring. Growth Capital helps you avoid this problem by being completely transparent about the terms and fees. Don’t hesitate to ask us questions to ensure you understand the factoring process.
Forgetting to ask about the upfront advance percentage
Before you sign a factoring agreement or contract, it is vital to know the specific advance percentage that your business will receive upfront. The factoring company usually purchases a business’s accounts receivables in 2 installments: a factoring advance that is paid immediately, and a rebate of the remaining balance (less a factoring fee) that is only provided when the customer makes a full payment. The factoring advance is calculated as a percentage of the invoice face value. Factoring advance rates can range depending on your industry and/or your customer base. You need to be certain that this initial advance payment is sufficient for your business in order to avoid any complications later.
Not reading the agreements or contracts
It is crucial to read your factoring agreement or contract in its entirety to avoid any unwanted costs. A factoring agreement is a financial contract that confirms the terms and conditions of factoring for your business. Your factoring agreement includes details for fees, penalties, and repayment terms. Typical factoring rates can vary widely from 1.5% to 6% of the invoice value per month. If there is anything you are concerned about, contact us for more information.
Not providing complete information about your business
Invoice factoring has a simpler application process than bank financing. Qualifying for factoring doesn’t require you to have good credit. Although it has a high approval rate, factoring companies will only proceed with a full application. Submitting an incomplete or inaccurate application can lower your chances of getting approved. Failing to provide complete factual information about your business can delay your application. In some cases, it can even lead to a denial of funding. To ensure that this doesn’t happen, make sure to fill all the requested information carefully and accurately. Include key particulars such as your business description, your revenues and expenses, and customers’ details.
Not understanding the fee structure
Different factoring companies have different ways of charging you for their services. Generally, the 2 main factoring fee structure models are tiered and flat fees. A tiered fee structure charges a fee per days outstanding. The charges accrue on a monthly, weekly, or daily schedule. Companies that use a flat fee structure will charge a percentage of the invoice. The fee charged will not change with the length of time it takes for your customer to pay. With a good understanding of the fee structure, you’ll know the exact costs of factoring for your business.
Not differentiating between invoices and contracts
Invoices and contracts are not the same. Both documents are used in a sales transaction between a buyer and seller. Even though both have similar terms and conditions, they serve different purposes and cannot be used interchangeably. A contract is an agreement for the future sale of goods or services. In contrast, an invoice is to notify payment due for products or services that have already been provided. You can factor invoices, but not contracts. A contract should only be included in your factoring application as a supporting document to verify the invoice.
Factoring invoices from late-paying clients
Late-paying clients are not the best fit for factoring. While invoice factoring is a great option for clients that pay within the traditional time frame, clients who don’t pay on time can add to your bills. Not only can their tardiness affect your application, but you become responsible for the factor when your customer does not pay. You may have to return the advance, or even pay late fees.
Not using factoring as a business advantage
Invoice factoring can be expensive if not used correctly. It is an alternative method of financing that should only be used to solve cash flow shortages due to slow-paying customers. If you do not use the advances to improve your credit score, grow your business, or pay your bills, then you aren’t using factoring to your advantage.
Not differentiating invoice factoring and invoice financing
While both terms are closely related, invoice factoring and invoice financing do not work the same way. Invoice financing refers to borrowing money based on your outstanding receivables. An invoice financing company does not purchase your invoices, rather they use your invoices as collateral to advance cash to you. It is treated as a loan, which has to be repaid along with any accrued fees and interest. In an invoice financing arrangement, your business maintains responsibility for tracking and collecting payments. Business owners should know the difference between invoice factoring and invoice financing to find the most appropriate method to finance their accounts receivables.
Customer payment delays can have a catastrophic impact on your business’s cash flow. Factoring your invoices is a viable way to overcome this challenge. When you factor your accounts receivables, you can gain access to debt-free funds immediately. Invoice factoring is simple, but it’s easy to make mistakes. Many businesses have made mistakes that end up bad for the companies. By knowing how to avoid the 12 common mistakes stated above, you can reap the benefits of invoice factoring with no issues. Want to get a factoring quote? Contact Growth Capital today!