Invoice factoring can help fix your business’s cash-flow problems. It allows you to get cash advances on your unpaid invoices. So instead of waiting 30, 40, 90 days to get paid, you’re able to get funds immediately from a financing company, known as a factor. It could help prevent hiccups in your day-to-day operations, allowing you to grow faster than you’d be able to otherwise. But as with any new financial arrangement, you need to watch out for obstacles before you begin factoring.
Here are 3 common factoring mistakes:
1. Not reading your factoring contract carefully
It’s important to read a factoring agreement carefully. The factoring agreement is a legal document, and usually written in a formal legal language. If you do not have experience in legal contracts, they could look confusing. The terms in the factoring agreement should match the proposal you may have received, but many times there are fee penalties or types of contingent fees for certain events not found on a proposal. You need to pay close attention to the fees that you would need to pay as well as how they are calculated and that is found in the factoring agreement. There may also be restrictions to the types of invoices you could submit for funding within the factoring agreement.
You should also know it’s important to compare factors and their agreements to choose a company that will meet your needs without forcing you into restrictive terms or unnecessary expenses.
2. Failing to Connect the Factor With Your Customers
As the business owner, you will need to help connect the factor (the company providing the financing) with your customers (whose unpaid invoices you’re trying to turn into working capital).
Since the factor gets paid by your customers, it would want to verify the quality of the receivables during onboarding. It would also want to establish a contact that it can reach out to and verify invoices on an ongoing basis.
You want to approach the onboarding process with caution. If you micromanage the interaction, the factor may suspect that you’re setting it up to fund fraudulent invoices. You could also upset customers if they have to spend too much time dealing with the factor.
So what should you do? The best solution is to reach out to your customers early on and tell them to expect a call from the factoring company. If you don’t already have it, ask your customer for the contact information for the person in charge of for paying the invoices. Let the accounts payable person know he or she should also expect a call from the factor.
You should then reach out to your factor and share the contact information for the person you usually work with to verify the business relationship and the accounts payable person who can verify invoices. You can also share any pertinent details about your working relationship with that particular customer to help your factor be more efficient. If you have one, allowing the factor to access your vendor portal with the customer could help expedite the onboarding.
Making the process smooth for both your customer and the factor is an important step in building a good working relationship with all parties. And, it can help ensure you’re set up for smooth sailing going forward.
3. Not having the proper accounting set up
Another mistake that business owners typically make is waiting until it’s too late to set up an accounting process that can accurately track your factoring details. Start on the right foot by creating procedures to track the factoring advances, fees, payments, and reserves. This could save you a lot of time later.
As a reminder, factors typically give you an advance that’s 80 to 90 percent of your invoice amount. Once your customer pays the invoice, the factor gives you the remainder of the invoice, also known as your reserve, minus the fees.
Remember that factoring fees may depend on how long the invoice remains unpaid. So you’d want to keep track of when you factor and when invoices are paid so you can calculate if you’re being charged the right amount in fees.
An efficient accounting system would also allow you to keep track of how much you’re paying in factoring fees and how your business is doing overall. Trying to go back and retrace a year’s worth of advances and fees on all the invoices you factored can be a nightmare. It’s not a situation you want to be in. Instead, set up a process from the beginning so you can keep a close eye on your business’s health and your factoring-related expenses.
Learn from others’ mistakes
Invoice factoring allows you to unlock capital trapped in your unpaid invoices. This can help your business deal with short-term cash flow gaps and even can even help your business to flourish. Many companies choose to factor but easily make one or more of these mistakes. Avoiding these three mistakes can help you maximize the benefits of a smart financing option.
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The information and insights in this blog post are provided for educational purposes only, and do not constitute financial advice from BlueVine. Please consult your financial advisor before making any business financing decision. For information about BlueVine products and services, please visit the BlueVine FAQ page.
This article was first published on April 2, 2018. It was updated on
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