invoice factoring mistakes

Top 21 Common Invoice Factoring Mistakes to Avoid

September 2, 2020

Some of the important invoices factoring mistakes to avoid are as follows:

FAILING TO SEND THE INVOICES

Many companies make this mistake. You cannot get the funds if you fail to send an invoice. by sending an invoice, it will help you to keep a check on your payments.

DELAYS IN SENDING THE INVOICES

The best time to send the invoice to a customer is as soon as you finish the delivery or the project. You should not wait for long. Your customer’s payment method may be different from yours, which might delay your payment.

SENDING INVOICES TO THE WRONG PARTY

Sending no invoice at all will get you no money, but sending it to the wrong person can make your payment slow and delayed. You must always communicate well with the company and get all the details and information right.

NOT READING THE AGREEMENT PROPERLY

You must go through the agreement properly before signing it. You should understand the fee structure and terms that are involved in invoice factoring. Some factoring companies charge an extra fee, the details for these extra fees should be found in the agreement. The agreement contains every tiny detail, from the client’s name to rates and dates.

PAYMENTS THAT ARE MISDIRECTED

Small businesses need to properly understand invoice factoring even though it has been around for a long time. One common mistake that occurs is related to payments that are wrongly-directed. This means that you receive the money and payment and not your invoice factoring company.

Also Read: How to Use Invoice Factoring for Small Business

SUBMITTING PURCHASE ORDERS INSTEAD OF INVOICES

Sometimes business owners submit purchase orders instead of invoices. They are not the same. Purchase orders only have details about the products and services that haven’t been delivered. They focus on the purchase and not on the money that is owed. This is why purchase orders cannot be factored.

NOT DIFFERENTIATING BETWEEN CONTRACTS AND INVOICES

Contracts are a legal agreement that displays the commitment to purchase services and products. On the other hand, invoices are documents that display that the services and products have already been given. You cannot factor a contract, only an invoice. An invoice should only be included for your factoring application as a supporting document.

CONFUSING INVOICE FINANCING AND INVOICE FACTORING

Business owners often confuse invoice financing and invoice factoring is the same thing. Invoice factoring is more flexible than financing. The invoice financing companies do not buy the invoices but only use them to advance cash.

SELECTING INVOICE FACTORING FOR EVERY FINANCIAL REQUIREMENT

Invoice factoring tends to be more expensive sometimes than a traditional bank loan. Accounts receivable financing is easier to get and is suited best for small businesses. Invoice factoring services are not satisfactory for long-term financial needs. It is important to carefully consider funding options that suit your business well and are best for its growth and development.

MISINTERPRETING THE RATE AND FEE STRUCTURE

Invoice factoring fees are different from traditional bank loans. Many small business owners and operators make the mistake of taking this lightly, and have to deal with financial issues later. The fee structure for the factoring company range is either flat or variable.

The lower your rate will be if you factor your invoices more. You must understand the terms, percentages, time value, and how the fee is applied.

NOT INQUIRING ABOUT UPFRONT ADVANCE PERCENT

Invoice factoring gives you an advance in exchange for your invoices that are not paid. You need to make sure that the initial amount you get is sufficient to fund your business requirements. You get about 85% of the invoice payment and not the full amount.

The remaining amount is paid once the client pays the invoice. This amount will not include the fees of the factoring company.

NOT LOOKING AT THE MINIMUM NEEDS

Some factoring companies offer plans with minimums, while other factoring companies offer plans with no minimums. A factoring minimum is an amount that you require to factor for a given period time. This could be a month, a quarter, or a year.

NOT SUBMITTING A PROPER APPLICATION

One important requirement to get funds through invoice factoring is that you should always submit an accurate application form. Wrong information can delay your process and also get denied. Provide important information about your business, expenses, revenues, and details of your clients.

LEAVING THE SECTIONS BLANK OF THE APPLICATION FORM

One of the common invoice factoring mistakes to avoid is not to leave a section of the application form blank. Missing information never looks good with the authorities.

NOT HAVING RELIABLE CLIENTS

If your customer pays late and is not reliable, then they are not the best fir for factoring. Factoring companies get paid when the clients make the payment. Unreliable customers can affect your application.

IGNORING YOUR CREDIT SCORE

A credit score is not considered to get invoice factoring approval. But you will do well by having a strong credit score. You should always check your credit reports and review them to ignore trouble like bankruptcy, debt, tax liens and so on.

NOT SUBMITTING ADEQUATE SUPPORTING DOCUMENTS

To get approved for factoring, you need to submit many documents like order confirmations and receipts. Instead of sending documents through fax or online, you should consider taking professional computer programs for help. Such software will speed up the process and decrease the risk of rejection.

NOT MENTIONING LIABILITIES

Business owners make the mistake of not mentioning the details about debts because they fear they might get rejected. Factoring companies check whether your company is in debt or not. So concealing this information will only make your application problematic.

IGNORING THE HIDDEN COSTS

Many factoring companies often have hidden fees and costs to increase their profits. There are credit checking fees, service fees, application fees, long-term agreements, monthly fees, etc.

NOT INCLUDE DETAILS OF SERVICES AND GOODS PROVIDED

Businesses do not include details of services and goods they have provided to the customer in the invoice, this leads to delayed payments. You must always include details of every item in your invoice to ignore misunderstandings.

NOT MENTIONING THE MODE OF PAYMENT

Your customers will not know your preferred mode of payment. You need to inform your customers that they need to pay either by check, cash, PayPal, etc. Online payments are the most suitable payment option.

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