Invoice factoring can be a convenient way to get the funds your business needs during a cash flow crunch. When you sell an invoice to a third-party company, the invoiced buyer takes over payment collection on the invoice and forwards you a portion of the face value. The amount you receive will not include the full value due to the invoice buyer’s fees. Some companies also hold out a portion of the value to put into an escrow account until your customer pays the invoice in full.
As convenient as invoice factoring can be, it’s also important to know what you’re getting into and avoid common mistakes such as:
- Setting up terms with your customer that cause payments to go to you instead of the factoring company. Be sure to double-check your paperwork to avoid late payments.
- Not understanding the fees: Factoring companies typically charge clients a small percentage of the invoice value to cover their own costs. Just be sure that you know what the fees are to avoid an unpleasant surprise later.
- Not setting aside enough time to complete paperwork: Because the factor takes over collection of the invoice total, expect to complete a significant amount of paperwork. This is necessary in case your customer defaults on payment.
- Submitting a purchase order instead of an invoice: A purchase order is a request for items that your company has yet to receive while an invoice is a bill for delivered goods. You cannot factor a purchase order because the request could always fall through.
- Over-reliance on invoice factoring: You could find yourself in a vicious cycle of debt if you don’t manage cash flow well enough to the point you frequently need an advance. This is due to higher-than-average interest rates on invoice factoring compared to more traditional forms of credit.
- Not accessing other forms of financing that would work better for your situation.
Invoice factoring is just one of the many financial products we offer here at Commercial Capital Finance. Please contact us today to learn more.
