Every business runs into cash flow problems at a point in its operation. Sometimes, startups need extra cash to get new clients, or occasionally long-term businesses need an additional hand in managing cash to take on new projects. In that case, there are many finance options available for businesses and invoice factoring is one of them. When signing up for invoice factoring, there are some mistakes that every business should avoid to ditch spending extra time and money.
- Invoice factoring before delivering services
Some businesses try to factor in invoices for services that haven’t been completely delivered yet. This is a common misunderstanding that doing so might lead to getting paid sooner than usual. In reality, it has the opposite effect because the factoring companies end up rejecting these invoices and it ends up delaying the whole process. To avoid this mistake, make sure all your work is completed.
- Lack of supporting documentation
Now that you want to factor in your completed invoices, it’s important to provide evidence that you have already provided the promised products or services to customers. Documents like contracts, delivery notes, and delivery confirmations are required by most factoring companies. Organise important communication proof with your customers to avoid any last-minute pressure.
- Not knowing cash advance limits
Factoring companies typically provide a cash advance of 70-90% of the total invoice value. The amount of cash advance fluctuates depending on the specific factoring company. Understand the advance rate of the factoring company you are working for and plan your cash flow accordingly.
- Overlooking the impact on customer relationship
In the case of invoice factoring, the unpaid invoice collections are handled by the factoring companies directly. This impacts your customer relationship depending on how the factoring company deals with its customers. So, choose a factoring company that professionally deals with your customers to avoid losing your customer’s trust.
- Factoring a low volume of invoices
Factoring a small number of invoices often isn’t cost-efficient because of the factoring rate and additional fee. This reduces the cash benefit you receive from factoring. If you have a low volume of invoices, you need to analyse whether factoring them makes financial sense or not. Also, communicate it with your factoring company and look for companies that offer flexible plans for businesses with a small number of invoices.
- Lack of research on factoring companies
The financing market in the UK is huge, and not all the factoring companies offer the same terms, factor rates, cash advance, and services. Choosing one factoring company without proper research could possibly rob you of better terms and low factor rates. Look for invoice factoring companies that are the experts in your business industry. Review their previous client experiences, and testimonials and compare factor rates before signing up.
- Not negotiating factoring fee
Factoring fee varies with each factoring company, and some businesses make the mistake of accepting the first offer without negotiating. There is nothing wrong with negotiating for lower rates or communicating your needs so always do so. Many factoring companies are willing to provide better terms when negotiated with.
- Relying too much on factoring
Don’t rely too heavily on invoice factoring. If you end up always depending on factoring as your primary financial strategy, this is a sign that you need to review your cash flow altogether. Use financing solutions as short-term solutions.
- Failing to plan for the end of the contract
Invoice factoring is a contract-based financial solution. When the contract ends, often there are renewal terms or clauses that businesses overlook. If you don’t plan ahead you might find yourself amidst a surprise.
- Choosing the wrong type of factoring
Factoring is majorly of two types: recourse and non-recourse factoring. The major difference between both is the risk associated. In recourse factoring, you are responsible for in case of non-payment. And it’s the opposite case in non-recourse factoring. Consider how much risk you can take before signing up for either of them and choose according to your needs.
- Not understanding the contract terms
Factoring contracts often include fine print about fees, payment timelines, risk evaluation, contract exit terms, and much more. Read the contract carefully and ask questions from your factoring provider to avoid unexpected expenses.
- Overlooking possible hidden fee
Factoring companies may charge additional for things like low invoice volumes, ending your contract before time, account management, administrative charges, etc. You should always request a detailed fee breakdown to avoid paying unexpected fees.
- Using factoring for long-term expenses
Invoice factoring should be used for dealing with short-term expenses to fill the gap in cash flow. Use the advance amount for urgent expenses that bring in short-term revenue. Using it for long-term investments like opening a new location, or launching a new product can ultimately drain your cash.
Invoice factoring can bring in additional cash to improve your cash for the short term. It proves to be beneficial for businesses if used wisely. Just avoid the above-mentioned mistakes to fully experience the advantages of invoice factoring. For more information related to invoice factoring ComparedBusiness is here to help your business.
