Invoice factoring is a powerful and targeted solution for businesses contending with the delay between selling products or services and receiving payment. What is factoring, exactly? The term invoice factoring refers to an arrangement where a business exchanges existing, unpaid invoices with a financial institution, receiving a line of credit in return.
Invoice factoring is uniquely suited to helping small companies just like yours avoid cash flow crunches caused by delayed payment on invoices. However, just as with any financial arrangement – whether it’s a major loan or a company credit card used for small incidentals – there are certain best practices to keep in mind. Keep these common invoice factoring mistakes in mind to make sure you get the most out of this valuable offering.
Invoice factoring mistakes to watch out for
Lack of strong accounting control
Small-business owners have a lot on their plate, often wearing many hats and handling critical aspects of running the company by themselves. Your current approach to managing and tracking invoices, whether handled by you or an employee, may work perfectly for your individual needs as a business. When you partner with a financial institution, you need to be sure certain aspects of your accounting practices in general and accounts receivable workflows in particular are efficient and error free.
One of the most significant errors that can occur in an invoice factoring relationship is the submission of duplicate invoices due to confusion or a lack of oversight. This can erode the positive relationship you’ve built with your lender and, in some cases, even disqualify you from further participation in an invoice factoring agreement. Similarly, accepting a payment from a client directly when the invoice has already been passed along to your partner can quickly lead to problems. Make sure you provide updated payment information to clients and quickly pass along any you receive to your factoring partner.
Using the wrong document at wrong time – or sending it to the wrong person
Invoices and purchase orders are similar, but have a major difference between them that is glaring in the context of invoice factoring. Purchase orders represent an order not yet fulfilled, meaning no payment is expected or due. Although they represent an earlier step in the process, they aren’t actionable from a collections perspective and can’t be used in place of the invoice. That goes for other documents, like contracts and similar agreements, which indicate an intent or commitment but not the actual delivery of goods or services, as well.
Sending an invoice to the wrong company, or even the wrong department or office of the right company, is another critical error to avoid. Keep detailed records of where invoices should be sent to help your accounts payable department and avoid any delays or mistakes related to your invoice factoring line of credit.
Not accounting for returns and similar processes
You need to be sure any invoices passed along to your financial institution can’t be rendered irrelevant by a partial or full return of products for any number of reasons. Make sure you discuss your return policy with your factoring partner and have a strong understanding of how it can affect the terms of the line of credit provided to you.
Working with a partner who doesn’t support you
Not all financial institutions are created equal. To ensure you have as positive and effective of an invoice factoring experience as possible, make sure to choose an established, reputable and caring lender. TAB Bank values the relationships we build with our clients, and we back that up with strong support and a desire to help your business succeed. To learn more, get in touch with us today.
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