Outstanding invoices can sometimes cause cash flow problems for small businesses. This can be remedied through a type of asset-based lending called invoice factoring, where outstanding invoices are sold at a discount to a third party, known as the factor. Unfortunately, many small businesses make mistakes when using invoice factoring. Luckily, we talked to the pros and identified invoice factoring mistakes to avoid.
The following are 15 of the most common invoice factoring mistakes to avoid:
1. Not Asking for Maximum Limits Upfront
Brendan Green, General Manager, Octet Finance
2. Disorganized Financial Record-Keeping
Art Omega, Senior Underwriter, BlueVine
3. Not Knowing the Different Types of Facilities Available
Stephen Dinsmore, Senior Funding Manager, Sedulo Funding
4. Failing to Understand the Terms of the Contract
Anne MacRae, Vice President of Business Development, Express Business Funding
5. No Proper Exit Strategy
Connor Cranford, Marketing Director, The Southern Bank Company
6. Duplicate Or Fake Invoicing
Thomas Geisel, Executive Vice President, Sterling National Bank
7. Not Knowing How Factors Interact with Your Customers
Scott Winicour, President, Gibraltar Business Capital
8. Not Understanding Fees & Charges
Kosei Okubo, CEO, Founders Guide
9. Confusing Invoice Factoring and Invoice Financing
10. Accepting Payments From Clients
11. Providing Inaccurate Company Financial Information
12. Not Providing Supporting Documentation
13. Misunderstanding the Upfront Advance Percentage
14. Failing to Consider Your Return Policy
Evan Tarver, Finance Editor, Fit Small Business
15. Factoring Invoices from Tardy Customers
Bottom Line
If your small business regularly has outstanding invoices, this can result in working capital issues and cash flow gaps. Invoice factoring, which allows you to get paid now for outstanding invoices at a discount, may be a good solution. Whether you are new to invoice factoring or have been using it for quite some time, make sure to avoid the 15 common invoice factoring mistakes listed above.
John Thai
April 1, 2016 at 9:54 pmGreat information Priyanka! I wanted to add that some smaller factoring and purchase order financing companies may have more lenient minimums and fees which can benefit the small businesses and their cash flow. Premier Trade Solutions does just that and also values relationships with the small business owners.