3 Mistakes to Avoid When Factoring Outstanding Invoices

Woman counting coins and paper billsHaving enough cash flow is extremely important, especially for small businesses. If it takes a while for your clients to pay up or they’ve only paid a part of the services they request, there are several financing options you can use to generate the cash you need. Among them is invoice factoring, which provides an advance on outstanding invoices. It’s highly recommended for those who own business-to-business companies, especially those that offer in bulk but don’t have yet enough resources to provide that bulk.

Experts at TAB Bank explain that factoring is for companies that routinely deal with high-volume invoices. It’s a convenient way to gain access to financing. While this method can help ease the cash crunch, it can be a little complex and mistakes could lead to a considerable loss. Watch out for these common errors made by entrepreneurs:

Failure to Understand the Fine Print

It’s a golden rule to read the details of the contract carefully before signing, and the same goes for invoice factoring. Be sure to understand the fine print and be on the lookout for fees beyond the factor rate, which typically range from 1% to 5%.

Misdirecting Payments

When handing over your receivables to a factoring company (in exchange for cash), all payments should be directed to them. Failure to do so could tarnish your relationship with the company and even trigger penalties. A good way to do it is to set up a new bank account for the factored invoices, which you will give to your clients. This way, all payments could be redirected immediately to the lender.

Submitting Purchase Orders

It’s a huge no-no to submit purchase orders as invoices. Remember that this is just a client’s commitment to purchase, but they don’t represent revenue.

Businesses that go through seasonal fluctuations in the industry can benefit from an increase in cash inflow to keep their operations running smoothly. Keep in mind, however, that you need a solid grasp of the type of financing you’re aiming for.