This option essential “sells” unpaid invoices to a lender at a discount in exchange for receiving most of the value immediately. Factoring is a great way to maintain a balanced cash flow for your small business, but making the most of the process requires avoiding a few common mistakes:
1. Choosing the First Lender You Come Across
This type of financing is proven and useful for many different businesses. In fact, even large companies may turn to a factor when they need capital for expansion. However, a big part of the success of using invoices as valuable assets is choosing the right financing partner to work with. You want a lender that is friendly, patient and trustworthy. This type of financial organization takes the time to answer your questions and explain what to expect. They can clearly show you the pros and cons of various financing options available so it’s easier to take care of your business.
2. Not Reading the Agreement Carefully
Factoring can have different terms depending on the lender. Some charge a flat fee per invoice or require a percentage of the invoice’s value. Others charge monthly maintenance fees or other fees. To maximize your benefits, it pays to read the agreement before signing so you know exactly how much this type of financing will cost.
3. Not Understanding Responsibilities
It’s important to know who is responsible for what when entering into an invoice factoring agreement. Will you handle the collection and submit the required percentage to the factor, or will the lender take care of debt collection completely? Different lenders use distinct methods, and a smooth working relationship means knowing how much effort you need to invest in the process. Also, some business owners prefer handling collections themselves to preserve a close relationship with customers.
4. Confusing Purchase Orders With Invoices
Purchase orders and invoices can seem similar, but they’re not the same for purposes of cash advances. Only invoices qualify as assets that can be used to obtain capital. Submitting POs continually may make a lender reconsider working with you. It’s easiest if you set aside invoices you want to use for financing in a separate folder immediately. That way you avoid confusion.
5. Not Sending Payments
Another thing that lenders don’t like is not receiving payment. If the lender handles collections, you have nothing to worry about. However, if you’re in charge of sending the appropriate percentages, make sure to direct customer payments to the correct bank account.
Invoice factoring is an effective alternative financing method for giving your business an infusion of cash without acquiring debt. You don’t have to apply for a loan, use real estate as collateral or invest weeks waiting for approval.