Invoice Factoring Mistakes You Must Not Make As a First-Timer

Updated: Sep 14

If this is the first time you have opted for invoice factoring, you must know that it is an easy loan option for your small business. It can help your business avoid cash-flow problems and keep the operations running. Invoice factoring is a one-of-its-own-kind business solution that can benefit both big and small businesses by providing cash advances on their to-be-paid invoices. With this easy and alternative business lending option, all types of companies can get access to funds immediately without having to wait for 30 to 45 or even up to 180 days to get paid by the buyer.

The factoring finance product is a great way out when your balances and payments are due, and you need a sufficient amount of cash to fulfill the business needs. You can sell your invoices at a discount to a factoring company. In addition, if you are a startup or seasonable business, factoring your invoices can be an awesome solution to tackle the varying payment schedules. However, keep in mind that with new financial arrangements come tricky details that people often overlook, especially if they are first-timers. If you can relate to this, below we've listed some of the most common invoice factoring mistakes, and how Porter Capital can help your company get the working capital your company needs. 

1. Glossing Over Factoring Contract

You never sign any binding document without weighing its pros and cons. The same rule of thumb applies when you get into the invoice factoring contract. Simply put, always make sure that you not only read but also understand the factoring agreement before you sign it. It is worth noting that an invoice-factoring contract is a legal agreement and has legal and formal language. It is always better to consult a professional business lawyer to understand the contract so that you do not wade through the legal terminology.

The most important things in your contract are the terms and conditions of the agreement. Make sure the terms used in the agreement must match your factoring proposal. Many times fee penalties are not included in the factoring agreement. It usually happens when you sign to choose a factoring company that files hidden charges. This is when you need to show due diligence and take a closer look at the fee structures and fee penalties. 

Besides this, your factoring agreement may have restrictions on the type of invoices you want to submit to get the funds. So comparing factoring firms and their agreements can benefit you before you sign a contract. 

2. Create a Muddy Relationship with Customer and Factor

Remember that when you opt for invoice factoring, you have to maintain three relationships. The one is between you and your factor, the second is between you and the customer, and the third is between factoring company and customer. To make the most of the invoice factoring deal, it is imperative that these relationships are smooth and have strong coordination. Many entrepreneurs, when first time opts for invoicing factoring, do not consider the importance of maintaining a strong relationship with the factoring companies or customers. 

Do not forget that you need help to connect factoring companies and customers whose unpaid voices you want to turn into capital. Once the customer honors the invoice, he/she needs to verify and evaluate the quality of account receivables while they are on board. This is when customers and factoring companies need to maintain contact to be able to reach out. If you micromanage this interaction, it may make things fishy and doubtful for a factor such as fraudulent invoices. Similarly, if you do not take your customers in confidence when factoring your invoices, it can upset the customers. Make sure you reach out to them and keep them in the loop about your contract or agreement about invoice factoring. The process is for your chosen factoring company.

As a business owner, you need to share the authentic contact information of your customers so that you can verify your business relationship. Make sure to provide pertinent information to your factoring company about the working relationship you have with any particular customer. It will help factoring firms understand your relationship with the customers so it will deal them more efficiently. You, as the center persons in the business relationship, can do many things to make the factoring process smooth for your factoring company and customers. Only when both parties work in coordination, it becomes smooth sailing.

3. Not Using the Right Accounting Setup

This is one of the biggest mistakes many small business owners make when factoring invoices for the first time. They “wait” until it is too late to find an accounting setup that can track their factoring details accurately. A business must have various procedures and setups to help them track payments, fees, reserves, and, most importantly, factoring advances. An efficient set up saves a whole lot of time for the business owners. 

An invoice-factoring firm typically pays you 80 to 90 percent advance of invoice amount when you are a refresher. Once your invoices are paid, the factoring company sends you the remaining amount (reserved after deducting their fees). When you have an efficient accounting setup, you can easily keep track of your factoring fee and the overall financial progress your business is making.

Retracing fees and advances record on the factored invoices at the end of the year, however, can be a cumbersome task. That is what makes using an accurate accounting setup vital to manage and track your factoring-related expenses and business health. Quick access to a business capital can prevent hiccups in your business operations, allow you it grows, and excel faster. However, it is important to be careful when opting for the new funding solution if you are amateur. If you are not working with reliable factoring firms such as Porter Capital, you might not be able to take advantage of this finance alternative. 

You must above the mistakes mentioned above, in this regard, when using invoice factoring to keep things smooth and hassle-free.

By avoiding these mistakes, you can conveniently access to working capital for your growing business. Thankfully there are legitimate and honest invoice factoring companies out there and Porter Capital just happens to be one of the best factoring companies in the United States, which has been around since 1991 and funded nearly $6,000,000,000 worth of working capital, is available to help guide your company down the correct path, all you have to do is take the first step and reach out by filling out the no-commitment form below and one of our expert financial representatives will be reaching out to discuss options.

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