If you’re a small business and you’ve decided to give factoring a try, good for you. You’re on your way to easy cash flow that will keep your business running smoothly.
Even though you’ve researched it and found it to be a valid way to keep your cash flow going and effectively outsource your collections, there are still a few mistakes that you can make when you choose to engage a factoring company. And we’re here to help you avoid those mistakes.
Mistake 1: You fail to read the invoice factoring fine print.
Don’t treat factoring agreements like terms and conditions agreements on the internet and fly right past them. They may not be the most exciting thing to read, but skipping over fine print in the factoring agreement can come back to bite you.
What you really want to be on the lookout for are fees that may be tacked on in addition to the factoring rate.
Less scrupulous factoring companies will tack on fees for things like checking your credit score, early repayment or some kind of monthly subscription fee for their service. Always read the fine print and make sure your factoring company is being completely transparent. (Or, alternatively, you could just factor with us since we don’t do any of that shady stuff.)
Mistake 2: You fail to direct payments to the factoring company.
A common error for businesses that are just getting started with factoring is to accidentally misdirect payments meant for the factoring company. Remember the factoring company now owns the invoices, so payment for those invoices must go to the factoring company. This may mean setting up a new bank account and informing your customers that they need to pay into that account or redirecting payment in some other way.
If you fail to get these payments properly redirected to the factoring company, the factoring company might just charge you a fee for that or terminate the relationship if it happens regularly.
Of course, a good factoring company will explain clearly to you how to redirect payments and will even work with you to make sure you fully understand what needs to happen and how to do it.
Mistake 3: You submit a purchase order instead of an invoice.
While purchase order financing is a thing, it’s different than invoice factoring. If you have an invoice factoring agreement, you cannot send a purchase order in place of an invoice. Most businesses that do this do it because they haven’t quite grasped the system yet. It’s usually an honest mistake on the part of the business, but one that you should try to avoid.
Mistake 4: You fail to account for the time needed for paperwork.
Regardless of what it’s for, paperwork takes a long time and factoring is no different. When looking for a factoring company, it’s prudent to ask about the turnaround time between signing the agreement and getting your cash, as there are a lot of steps involved in arranging factoring.
Now that you know what mistakes to avoid (although technically you should try to avoid all mistakes), you can enter into a factoring agreement with more confidence, knowing what to look for, what to do and what not to do.
[Photo courtesy of Lisa Moffatt on Flickr]