15 Invoice Factoring Mistakes to Avoid from the Pros

Businesses often enter into a factoring facility as a solution to free cash flow. Generally, factors will want to assess your business and may apply a maximum limit on how much you can advance. One common invoice factoring mistake is not learning right away what this maximum limit is. Ask the factor to set those limits upfront so that you know the overall funding available to you.

Disorganized record-keeping and improper accounting are common invoice factoring mistakes that are usually discovered months later. This can leave you vulnerable to being overcharged by the factor. The best solution for this is to start on the right foot with a sound accounting practice. Plan ahead on how you will account for the advance, the fees, the payments, and your reserves.

A lot of businesses approach their banks for funding but are not provided with the most suitable facilities. They don’t know any better because most businesses are unaware that there are multiple options, dependent on their individual circumstances. There’s no one-size-fits-all facility, and it’s best to consider everything available before committing to a funder.

Failing to understand the terms of the factoring contract is one of the most common invoice factoring mistakes that many borrowers tend to make. Is there a term requirement? Are there monthly minimums required? If so, what are the penalties for breaking the terms? These should be the first questions that you should ask the factor before deciding to work with them.

Before getting into a factoring relationship, make sure you know how to get out of it. Many business owners who enter into a factoring agreement don’t fully understand the length of the contract terms. You want to maintain flexibility and the ability to refinance. Executing multi-year provisions limits this flexibility. Signing no longer than a one year term puts you in the best position.

This could be as simple as a company submitting the same invoice twice, or it could involve submitting fake invoices added to a pile of valid accounts receivable. This could be avoided through continuous monitoring and verification of invoices before submitting to a factor. Submitting duplicate or fake invoices is a red flag that can prevent you from getting qualified.

Since factoring is based on the value of a company’s invoices, factors reach out to your customers for verification. This is critical your business and customer relations. When choosing a factor to work with, it’s important to consider their customer service. Factors should preserve your relationship with your customer and maintain quality service even during the verification process.

Many small businesses tend to overlook the fees and charges associated with invoice factoring. Some factors charge a flat upfront fee while others charge fees on a weekly or monthly basis. Other fees such as application fees, processing fees, and credit check fees may be charged on top of the advance fees. It’s better that you understand everything clearly before you agree to the contract.

Invoice factoring is different from invoice financing. For example, the latter does not purchase invoice but rather uses invoices as collateral to advance cash to clients. Making sure that you’re really doing invoice factoring (i.e. selling your invoices at a discount to a factor) is important if that’s the financing product you actually want.

When you factor your invoices, you don’t normally accept payments for the unpaid invoices that you already sold. Accepting payments directly bypasses the factor’s collection process and can put you behind with your factor, causing a lot of confusion. Make sure that you immediately forward your factor all payments you receive on purchased invoices and also provide your clients with the correct payment information to keep this from happening.

The terms of an invoice factoring arrangement vary depending on your company’s size, credit history, and stability. The factor will want to know more about your business and its anticipated revenues and expenses. When preparing an application, you should provide the factor with detailed and accurate financial information. Mistakes can lead to unfavorable factoring terms or even a denial of your application.

When applying for invoice factoring, you need to include order confirmations, receipts, and other documentation for your invoices. Failing to do so can be a cause for denial. Documentation issues are common when multiple documents are sent by different means, like faxing some documents and mailing the others. Sending all your documents online at one time is a great way to avoid forgetting something.

Invoice factoring pays you a percentage of the outstanding balance of your invoices, but you won’t get the entire amount up front. Typically, you get 70%-90% of the invoice amount up front. The remaining balance (less the factor’s fees) will be given to you when your customer pays the invoice. Make sure that you’re aware of the initial advance amount and that it’s sufficient for your business needs.

If you’re a company that has a return policy for your products or services, it could greatly affect your invoice factoring. For example, invoice factor companies place a larger discount on invoices with a return policy because the risk of not collecting is higher. This will limit your ability to factor your existing invoices and may cause a gap in funding when you expected to have your working capital needs filled.

Customers who pay late are not a good fit for invoice factoring. Invoice factoring companies get paid only when your customer pays the invoice, so a factor always evaluates whether your customers are responsible and timely payers. Factoring invoices from tardy customers can result in unfavorable terms or a denied application. Also, if you work with a recourse invoice factor, you’ll be responsible for paying if your customer doesn’t.