Common Factoring Mistakes to Avoid
Using the right specialty financing when your business needs working capital is one of the most important parts of keeping your overhead down when you’re in a financial crunch. While factoring is a great way to solve cash flow problems when you have a lot of unpaid invoices aging on your books, not all factoring agreements are going to be what you need in a given situation. That’s why you need to know about some of the basic mistakes newcomers make when working with a factor. Sidestepping these issues will help you get more out of your financing whenever you need to use this method.
First and foremost, check the fine print and make sure you understand the fees involved. They can cover a wide range, depending on the other conditions in your agreement. Generally, factors that finance your invoices without buying them outright will charge less up front, but many include penalties if the invoices go unpaid for a certain amount of time. There are even some factors with multiple penalty tiers, which can create problems for business owners who don’t know about them until there are consequences to their presence in the contract.
Another issue is clients who fail to direct payments to the factoring company they work with. Your factor takes over a collection when you make an agreement for financing, and if your customers send payment directly to you, it creates extra work for everyone. In some cases, it even invokes penalty clauses, which is why the very first thing to do is to make sure you’re aware of all the scenarios where extra fees come into play. Making sure your direct payments to the factor means being able to focus on other administrative tasks, too, and that’s a big part of the reason this financing is worth it to many business owners.
Last but not least, make sure you aren’t submitting purchase orders as invoices. If you want to factor purchase orders, there are some financing companies who will do that, but most factors are only going to take invoices. Even if you do find one that will finance both, those are two separate negotiations. You can’t pool them into one group and finance a mix of invoices and purchase orders because the actuarial tables for the two types of financing aren’t compatible. Beyond those major issues, remember to give your financing company time to process the paperwork before you need payment. Factoring is faster than most other forms of financing, but it is not an instantaneous process.