Invoice factoring is a valuable tool for small businesses and business owners. Read how to avoid these invoice factoring costs mistakes. Let’s say, for example, when you sell or distribute products, each of your manufacturers probably has a different day or part of the month when they pay invoices. If you don’t have a large amount of liquid cash flow to cover the regular expenses and costs of running your business, the pending payments from your clients can leave your company high and dry. If there’s a season when it’s slower for your business, each of your unpaid invoices counts, and having another company collect on them can be really useful. When you use factoring, an invoice financing company gives you a cash advance for your outstanding invoices with a small flat fee. The remaining balance is paid, less credit check fees, due diligence fees, and other charges such as a wire fees. We can help you determine how to avoid choosing the wrong factoring company or dealing with them incorrectly.
Understanding Your Agreements
Each factoring company has its own set of fees and rules. If you choose a company to give you cash for your unpaid invoices without reading the fine print, you could end up paying a lot more than is fair. Most factoring companies offer discount rates from 1-5%. Your company’s revenue and credit score can impact the rate that you are approved for.
Some shady factoring companies add on a lot of additional factoring fees. These additional fees put a dent in the amount of money that you end up getting for your services to your clients, which is hardly fair, so make sure that you shop around for a reputable invoice factoring company offering flat rates before making a final decision.
Invoice factoring fees also depend on whether you choose a recourse or non-recourse factoring program. Non-recourse factoring poses more risk to the factoring company, so the costs result are slightly higher advance rates. The factor advances most of the invoice amount—usually 70% to 90%—after checking out the credit-worthiness of the billed customer.
Accepting Payments
When you have a factor, you don’t normally accept payments for the unpaid invoices that they’ve already purchased from you. Accepting payments directly bypasses the factors collection process and can put you behind with your factor and cause a lot of confusion. Make sure that you immediately forward any funds you receive in your bank account to your factor and payments you receive on purchased invoices and also provide your clients with the correct payment information to keep this from happening to your business.
Not Choosing the Right Option for Your Business
Make sure that you choose the right option for your small business. Factoring may require monthly minimums for purchasing invoices. Factoring usually works more effectively if a business has a larger revenue stream. For a small business just starting out, factoring works best for high-growth situations, but might not be the best financial option. If you have a seasonal slowdown for your business, using a factoring service at this time can keep your cash flowing, which could prevent you from having to close or make cuts.
Contact us today or call us, toll-free, at 1-877-960-1818 and avoid these invoice factoring costs mistakes.
- What Is An Invoice Factoring Broker? - July 17, 2022
- 7 Tips for Buying Out a Business Partner or Majority Owner - May 13, 2022
- 6 Leadership Secrets Every Small Business Owner Should Know - December 9, 2021
