So, you’ve decided to opt in favor of factoring in order to sort out your cash flow woes? Well, you’ve made an excellent decision. Factoring is a fantastic way to make sure your business cashflow stays in shape till the actual profits roll in.
However, before you do enroll into a factoring program, make sure you avoid these errors. Debtor finance is a great tool provided you use it correctly.
Not understanding the fee structure
Depending on the factoring service you sign up with, the fee structure can vary. For instance, some factors follow the per week approach while others charge a flat rate.
Also, remember that fee also depends on how long your customer takes to make the payment. The more time the customer takes, the higher the fees will be. For instance, if the invoice factoring fee is set at 0.5% for each week and the customer takes 30 days (5 weeks) to pay, your final rate will be 2.5%.
You can avoid this by incentivizing your customers with rewards for timely payments.
Apart from the advance fee, you must also determine if your factoring provider charges extra for application, servicing or credit checks.
Not discussing advance percentage upfront
As you might already know, you only get up to a maximum of 90% as the cash advance on your invoice value. The remaining comes in when the customer actually pays up.
But, sometimes, your cash requirement may be higher than the agreed upon cash advance percentage. This can cause major problems for you. So, make sure you discuss the percentage beforehand. If it doesn’t meet your needs, you might have to look for another factoring provider.
Some factors expect you to submit all invoices for a particular customer while others expect that you submit a minimum number of invoices. If you need more flexibility, make sure you discuss it upfront. Don’t blindly sign a contract and suffer later.