Factoring includes the use of a business’ accounts receivables to get an additional capital. With invoice factoring, the business gives it invoices to a factoring company who offers a specific percentage of the total of the business’ outstanding debt. Cash will be available almost immediately and the business settles its debt with the factoring company if they customers pay the factoring service provider. But, it is imperative to understand the factoring contract’s terms and conditions as well as the fees involved before submitting your invoices. You will want to avoid the common mistakes below.
Ignoring the Factoring Application
Applying for invoice factoring is quite short when compared to applying for a bank loan. But not paying attention to your application may lead to putting unnecessary information. Ensure you spend time reading through the application first so that you will know the required information and provide it accordingly. Avoiding a mistake in the application will ensure that the process won’t slow down.
Not Reading the Fine Print
At the bottom of the factoring agreement, you can find details on fees, repayment terms and penalties. Ensure you read these carefully and understand the terms and conditions. Ask questions if there is something in the contract that you don’t understand. You must opt for this kind of financing with a full understanding of what to expect from the transaction.
Failing to Understand the Upfront Advance Percentage
Borrowing money from banks means that you get the full amount of money you borrowed. However, you need to pay it back with interest. With factoring companies, you get a percentage of your invoice’s outstanding balance up front. Thus, you should not expect to get the full amount. For instance, a customer owes you a $1,000 invoice. You can get 80 percent of the invoice amount from the factoring company up front. Such percentage is your advance rate. You get $8000 up front and the remaining $200 will be provided when the customer pays the full balance. The transaction benefits you since you get funded within hours or days rather than waiting for at least weeks to get an answer. Factoring Company Guide is your top choice among factoring companies in North America.
Failing to Consider the Factoring Fees
Factoring service providers charge a fee rather than an interest rate. Such fee depends on the time the funds are outstanding. Often, the fee is small if the outstanding balance ranges from 1-3% every month on the invoice’s face value. It is imperative to account such fee as you factor your invoices to ensure it does not eat up your gross margin.