For B2B companies that deal with high volumes of invoices, factoring offers them a great option than just sitting around in the hope that their customers will soon pay up. While waiting around for customers to settle an invoice can be frustrating, there are invoice factoring mistakes you do not want to make. Here are a few of them and how to avoid them.
1. Failure to Read The Fine Print
If there are any other fees charged besides the factor rate, it is most likely going to be found in the fine print. Factor rates which typically range from 1 to 5 percent of the total invoice amount factored depend on the revenue of the company.
Be on the lookout for additional fees such as early repayment fees or monthly subscription fees. Avoid falling into such traps by reading the fine print during the application process.
2. Failure to Direct Payments Correctly
Once funds are advanced by a factoring company, it is only wise to direct your customers to make payments to the account agreed upon. However, most businesses make the error of failing to advise their customers on what account to pay into and end up receiving such payments.
When payments are wrongly made, a factoring company may charge a fee for this. This miscommunication may cost you your relationship with the factoring company. To avoid penalties and the termination of the relationship with a factoring company, ensure your customers know what account to make payments into.
3. Submission of Purchase Orders As Invoices
Purchase orders represent products or services which are yet to be delivered to a customer and should not be presented in place of an invoice. The reason for this common error is based on the misunderstanding which people have on how the system works. Avoid sending in a purchase order as if it was an invoice because it does not represent the value of revenue owed.
4. Failure to Factor Time For Paperwork
Based on the fact that some factoring companies take over the collection of funds for an unpaid invoice, it is necessary to factor in the time such paperwork takes. Time is also an integral aspect of running a business and the time it takes to process paperwork can be considered as opportunity cost. It is important for business owners to consider this when choosing a factoring company.
Being conscious of these common errors and how to avoid them can be very helpful to a business.