A great many businesses are turning to invoice factoring as a way of generating cash quickly, so they don’t have to wait for incoming revenues which might be slow and inconsistent. However, there are some potential pitfalls to be aware of with invoice factoring, which you will need to avoid if you want to get the most benefit out of the process.
Failing to Redirect Payments
Once you arrange with a factor for the sale of your invoices, the factor then becomes the party that collects all amounts owed on those invoices. If your customers mistakenly remit payments to you, those payments need to be redirected to the factor, so that you can maintain a good relationship with the factor, and so you don’t incur extra fees because of the mistakes.
Confusing Them with Purchase Order Factoring
Keep in mind that purchase order financing and invoice factoring are two entirely different financial transactions and that you shouldn’t confuse the two procedurally. Remember that purchase order financing will provide working capital in cases where you have sales orders from customers, but you don’t have the money to purchase raw materials to fulfill those orders. Invoice factoring puts immediate cash in your hand when you sell some or all of your invoices to a factoring company.
Overlooking the Fine Print
One of the biggest mistakes that some small businesses make when becoming involved with invoice factoring, is failing to read the fine print on any agreement with a factor. In some cases, factors will charge several different fees in addition to the factoring fee, and these may be spelled out in the fine print but nowhere else. The fees may also be legitimate, but if you don’t know about them, you can get a nasty surprise when reconciling accounts with your factoring company.
Is Factoring Right for Your Small Business?
If you think factoring might be helpful for your small business, we’d like to hear from you. Contact us at Monstera Lending Group, so we can explain how factoring works and how it can be beneficial for your business.