You did it. You pulled the trigger and secured a factoring agreement. Congratulations! Next, you’ll want to understand the areas where factoring mishaps can potentially happen so you may avoid making these mistakes.
Factoring is an excellent option to bridge cash flow gaps by selling accounts receivable to an invoice factoring company. However, there are several blunders a company can make when navigating their shiny new factoring agreement.
We’ve delineated these avoidable errors below for you so that you may hopefully avoid them when using invoice factoring.
1. Not Reading the Fine Print
At the top of our list is not reading the fine print. While not exactly the most entertaining document on your “To Read” list, this part of the contract is not to be skipped. The actual terms within the factoring agreement will lay out all the specifics including, payment timing, the upfront advance percentage, and any sneaky fees. Note at Liquid Ally, our lenders do not have fees hidden deep down in the fine print.
The second benefit of reading the fine print ensures that you understand the conditions, eligibility, and how percentages are applied. These can get technical and confusing, even for seasoned pros. Ask questions, so you can avoid our next mishap.
2. Paying Unnecessary Fees
When unpleasant fees get buried deep in the fine print, it’s easier to be caught unaware. The fee structure varies with each factoring company. Some factor rates include additional fees that vary based on the length of time it takes for your customers to pay their invoices.
Additionally, some lenders tack on extra fees, such as credit check fees, transfer fees, or early repayment fees.
At Liquid Ally, we only work with lenders who don’t charge hidden fees or extraneous fees.
3. Not Creating and/or Sending Invoices
While some of you might be saying: “What? Really?” Not sending invoices is incredibly common. To be eligible for factoring, the company must issue timely invoices to their customers for work done or products sold. Sometimes, due to verbal contracts or agreements, etc., this step falls through the cracks. But if no invoice is remitted to the customer, no invoice can be sent to the factoring company for an advance.
The same issue can happen with simply remembering to send the invoice to the factoring company. If it’s not sent to the factoring company, no advance can be made.
4. Failing to Direct Invoice Payments Appropriately
Sometimes this process takes a little time for all parties to get the hang of. Depending on the agreement’s terms, invoice payments should be sent directly to the factoring company or redirected to a new bank account or drop box. It’s crucial to update payment directions for all your customers as your factoring agreement dictates. Clear communication will help avoid this mishap.
It’s important to understand the terms and potential fees in case a customer accidentally routes an invoice payment to you rather than the factoring service. Knowing when you might be penalized because of a forgetful client helps you determine when to intervene with a call or two. Hopefully, before a penalty occurs.
5. Overlooking Minimum Invoice Requirements
Finally, a term that frequently falls through the cracks is one requiring minimum invoicing. While many lenders are flexible, factoring companies can have minimum thresholds to meet. These thresholds could be factoring all invoices for any specific client or require a minimum volume of invoices. It’s important to consider if the business will be able to meet these obligations.
Break Free
These common mishaps are just some areas that companies overlook when entering into a new factoring agreement. Often, funding options are rushed due to a need to find cash fast. Being aware of potential trouble areas will help the company to start off on the right foot.
*****Review Your Current Agreement*****
At Liquid Ally, our goal is to find the optimal solution for our clients. Our high standards for our lenders weed out any unscrupulous practices that hide fees or make factor agreements overly complicated.
In the factoring arrangements we typically help set up there is no contract binding our clients. There is only an agreement that delineates the terms including a short notice period. They are free to shop at any time. This is a big deal. One of the complementary services we offer is a review of your current contract. Our lenders are frequently able to provide cost savings of up to 30%.
Schedule a Call or Liquidity Assessment today to learn how Liquid Ally can help you navigate your next factoring or financing decision.