Cash flow is a way to tell if a business is running smoothly or struggling. Long invoice repayment terms and outstanding payments can burn holes in your business’s bottom line and keep businesses stagnant. While business credit cards and bank loans can plug these holes, these are options that can incur debt. Invoice factoring is a debt-free solution to keep your cash flow smooth. Now nothing in the business field is easy. So we have put together a list of 15 common invoice factoring mistakes to avoid to keep you on the right track.
1. Failing to Send an Invoice
This may seem obvious, but several companies make this mistake. The consequences are obvious too – you cannot expect to be paid if you do not send an invoice. Whether you have written or verbal agreements with clients, you still need to make sure that you are paid for the work done. By sending an invoice, you remind your clients that they owe money. It is always advisable to have a record of what they owe you money for in black and white. Doing so will also help you track your payments as and when they come in.
2. Sending Invoice to the Wrong Company
This happens too! Sending an invoice to the wrong company entirely is rare, but not unheard of. This can be disadvantageous in several ways, but most importantly, it can lead to the revelation of sensitive information to complete strangers or competitors. This can not only reflect poorly on your level of professionalism but can also escalate into a potential legal risk.
3. Failing to Inquire about Upfront Advance Percentage
As already mentioned, invoice factoring gives you an advance in exchange for your unpaid invoices. However, usually, you receive about 85% of the invoice amount upfront instead of the entire amount. The pending amount is paid when the customer pays the invoice. This amount does not include the factor’s fees. You need to ensure that the initial amount you receive is adequate to fund your business operations. If it isn’t, consider other options, like short-term loan, to get working capital.
4. Not Reading the Fine Print Carefully
An invoice is akin to a financial agreement, which is why it is crucial to read the fine print. Keep your eyes open for any fees charged beyond the factor rate. Simply put, the factor rate helps determine the total fee to be paid for an advance on outstanding invoices. Factor rates vary from company to company and are typically determined on the basis of a firm’s revenue. They tend to range from 1% to 5%. Some invoice factoring companies charge extra fees for checking your credit score, monthly subscription fees, or fees for early repayment. The descriptions of these fees can be found in the small print. Not going through it can make them easy to miss.
5. Misdirected Payments
While invoice factoring may have been around for centuries, small businesses can take some time to fully understand how it actually works. One of the most common mistakes that take place relates to wrongly-directed payments, i.e. the money is received by you, rather than your factoring company.
6. Submitting the Purchase Order
Purchase orders are not invoices and should not be submitted in their place. These orders indicate products and services that have not been delivered yet. They only signify intent to purchase, and not revenue owed, which is why they cannot be factored.
7. Not Differentiating Between Invoices and Contracts
Contracts are agreements that show the commitment to buy products and services. Invoices, on the other hand, are documents that show that the products and services have already been provided. You can factor an invoice, but not a contract. It should be included only as a supporting document for your factoring application, in case it needs to be verified
8. Sending the Invoice to the Wrong Person
While not sending an invoice at all may not get you any money, sending the invoice to the wrong person/department can slow down or delay your payment. This typically happens when you’re billing a large enterprise with lots of staff and several departments. It is easy to get confused about who receives invoices in such organizations. It is, therefore, better to contact the company and get specific name and contact details of the concerned person and direct the invoices and other correspondence accordingly.
9. Undermining the Time Requirement
Some invoice factoring companies take up the task of taking over the collection of your outstanding invoices. This can mean handling tremendous amounts of paperwork and documentation, which can cost you a lot of time. Time is an important resource and spending it should be viewed as opportunity cost. Wasting time is equivalent to wasting money in the business world. Hence, select your clients wisely.
10. Choosing Invoice Factoring for Every Financial Need
Invoice factoring and a few other forms of accounts receivable financing options tend to be more expensive than traditional bank loans, particularly those guaranteed by the SBA. That’s because the annual rate of interest for SBA loans is relatively low. However, accounts receivable financing is easier to procure, which suits the needs of a small business, especially for the short term as they may have just started out or had low margins. Invoice factoring may not be suitable for long-term financial requirements as it may eat into a company’s costs. It is, therefore, important to pick funding options with careful consideration.
11. Delaying the Invoice
Do you often wonder about the best time to send out the invoice to a client? The ideal time for this is as soon as you complete the project or deliver the product. If you wait any longer than a couple of days, sending out the invoice may skip your mind entirely. Further, also bear in mind that the client’s payment cycle may differ from yours, which may cause your payment to be delayed.
12. Misinterpreting the Fees
Invoice factoring fees differ from those that come with traditional business loans. Several small businesses make the crucial mistake of taking this for granted, only to receive a financial jolt later. Some factors charge a flat fee and on a weekly basis with rates hovering around 0.5% per week. Of course, the total amount changes based on how long the customers take to pay the invoice. A great way to get paid sooner and pay lesser fees is to provide discounts to clients that pay early.
13. Confusing Invoice Factoring and Invoice Financing
Modern small businesses financing companies use a variety of technology to access an ocean of data to offer clients more flexibility in invoice factoring. In fact, invoice financing companies do not actually purchase invoices but use them as collaterals to advance cash to clients. Do bear in mind that invoice factoring or financing is primarily for B2B businesses that produce large quantities of unpaid invoices. They may not work well for small B2C businesses like restaurants or retail shops.
14. Not Understanding the Fee Structure
Not understanding the fee structure can contribute to making all kinds of mistakes when invoice factoring. For best results, it is important that you understand percentages, appropriate terms, how the fee is applied, and the time value of money.
15. Overlooking Minimum Requirements
While several modern day invoice factors enable you to pick the invoices you want to submit for financing. This choice is not offered by traditional invoice factors. In fact, you will need to factor all invoices from a specific customer or factor a set minimum volume of invoices each month. If the minimum limit isn’t met, you may be penalized. While some businesses are able to achieve this limit, others will naturally want more control over their factoring. The frequency and volume of your factoring should be considered when choosing the right factoring service.