Invoice Factoring Mistakes That You Should Avoid
Every business needs working capital more than ever due to COVID-19. Whether it’s for paying employees on time, working capital, expanding operations, or getting the equipment your company requires, having enough money on hand is essential. Invoice factoring, where you sell unpaid invoices to a financing company in exchange for a cash advance, can be a great solution. Here are six mistakes to watch out for:
Not Understanding Where to Send Payments
For the invoice factoring process to run smoothly, you need to make sure the financing company is getting its correct share of paid invoices. Sometimes, the financial institution takes care of debt collection. In other cases, your customers contact you, and it’s up to your accounting department to tell them where to send payments. Avoid problems by setting up a separate bank account specifically for factored invoices and direct those customers to deposit payments there.
Requesting Advances for Purchase Orders
Invoice factoring only works with actual invoices, not purchase orders. This is because purchase orders only represent an intent to buy; they’re not receipts showing that products have been delivered.
Not Reading the Contract Before Signing
Great financing institutions try to be clear about terms and the invoice factoring process. Still, it’s a smart idea to ask questions to make sure you understand the specifics. Before getting started, know what percentage of the invoice, called the factor rate, is kept by the financing company. You also need to know whether there are any additional fees, costs per invoice, penalties for errors, or requirements with unpaid invoices.
Ignoring the Benefits of Long-Term Loans
Merchant cash advances can be a lifesaver, but they shouldn’t be the only financing method you use. SBA loans and more traditional financing types typically offer lower interest rates that can save you lots of money for more extensive, long-term purchases of real estate or equipment.
Not Understanding the Difference Between Invoice Factoring and Financing
The two terms sound similar but are slightly different. Factored invoices mean you sell bills to the financing company in exchange for a cash advance. Invoice financing means you use your average sales, invoices, or accounts receivables department as collateral for a loan. Both options can be useful for businesses — the difference lies in how much capital you need and when.
Not Calculating Paperwork Costs
Getting capital from unpaid invoices can be an excellent solution but know what is expected of your company beforehand. Understand that each invoice may require additional paperwork and time from your business.