Let’s face it; if a business does not do well financially or is careless in handling its finances, it’s bound to fail sooner or later. However, do a great job of maintaining your cash flow , and you’ll effectively keep tabs on how much your business is spending and earning. Cash flow, therefore, is one of the most important components of business finance. It has tremendous bearings on whether your small and/or mediumsized business will make it or break it.
Speaking of cash flow, long invoice repayment terms and outstanding payments can burn holes in your business’s bottom line. While business credit cards and bank loans can plug these holes, several entrepreneurs are now considering debtfree options that have minimum or no effect on the outcome. Invoice factoring can prove to be a feasible solution to a business’s funding issues . However, it is easy to go wrong with it, which is why we’re here to help. Read the following 40 common but avoidable invoice factoring errors to always steer clear of them:
1. Failing to Send an Invoice
This may seem obvious, but several companies make this mistake. The consequences are obvious too – you cannot expect to be paid if you do not send an invoice. Whether you have written or verbal agreements with clients, you still need to make sure that you are paid for the work done. By sending an invoice, you remind your clients that they owe money. It is always advisable to have a record of what they owe you money for in black and white. Doing so will also help you track your payments as and when they come in.
2. Delaying the Invoice
Do you often wonder about the best time to send out the invoice to a client? The ideal time for this is as soon as you complete the project or deliver the product. If you wait any longer than a couple of days, sending out the invoice may skip your mind entirely. Further, also bear in mind that the client’s payment cycle may differ from yours, which may cause your payment to be delayed.
3. Sending the Invoice to the Wrong Person
While not sending an invoice at all may not get you any money, sending the invoice to the wrong person/department can slow down or delay your payment. This typically happens when you’re billing a large enterprise with lots of staff and several departments. It is easy to get confused about who receives invoices in such organizations. It is, therefore, better to contact the company and get specific name and contact details of the concerned person and direct the invoices and other correspondence accordingly.
4. Sending Invoice to the Wrong Company
This happens too! Sending an invoice to the wrong company entirely is rare, but not unheard of. This can be disadvantageous in several ways, but most importantly, it can lead to the revelation of sensitive information to complete strangers or competitors. This can not only reflect poorly on your level of professionalism, but can also escalate into a potential legal risk.
5. Not Reading the Fine Print Carefully
An invoice is akin to a financial agreement, which is why it is crucial to read the fine print. Keep your eyes open for any fees charged beyond the factor rate. Simply put, the factor rate helps determine the total fee to be paid for an advance on outstanding invoices. Factor rates vary from company to company, and are typically determined on the basis of a firm’s revenue. They tend to range from 1% to 5%. Some invoice factoring companies charge extra fees for checking your credit score, monthly subscription fees, or fees for early repayment. The descriptions for these fees can be found in the small print. Not going through it can make them easytomiss.
6. Misdirected Payments
While invoice factoring may have been around for centuries, small businesses can take some time to fully understand how it actually works. One of the most common mistakes that take place relates to wrongly-directed payments, i.e. the money is received by you, rather than your factoring company.
7. Submitting the Purchase Order
Purchase orders are not invoices and should not be submitted in their place. These orders indicate products and services that have not been delivered yet. They only signify intent to purchase, and not revenue owed, which is why they cannot be factored.
8. Not Differentiating Between Invoices and Contracts
Contracts are agreements that show the commitment to buy products and services. Invoices, on the other hand, are documents that show that the products and services have already been provided. You can factor an invoice, but not a contract. It should be included only as a supporting document for your factoring application, in case it needs to be verified
9. Undermining the Time Requirement
Some invoice factoring companies take up the task of taking over collection on your outstanding invoices. This can mean handling tremendous amounts of paperwork and documentation, which can cost you a lot of time. Time is an important resources and spending it should be viewed as opportunity cost. Wasting time is equivalent to wasting money in the business world. Hence, select your clients wisely.
10. Confusing Invoice Factoring and Invoice Financing
Modern smallbusinesses financing companies use a variety of technology to access an ocean of data to offer clients more flexibility in invoice factoring. In fact, invoice financing companies do not actually purchase invoices, but use them as collaterals to advance cash to clients. Do bear in mind that invoice factoring or financing is primarily for B2B businesses that produce large quantities of unpaid invoices. They may not work well for small B2C businesses like restaurants or retail shops.
11. Choosing Invoice Factoring for Every Financial Need
Invoice factoring and a few other forms of accounts receivable financing options tend to be more expensive than traditional bank loans, particularly those guaranteed by the SBA. That’s because the annual rate of interest for SBA loans is relatively low. However, accounts receivable financing is easier to procure, which suits the needs of a small business, especially for the short term as they may have just started out or have low margins. Invoice factoring may not be suitable for longterm financial requirements as it may eat into a company’s costs. It is, therefore, important to pick funding options with careful consideration.
12. Misinterpreting the Fees
Invoice factoring fees differ from those that come with traditional business loans. Several small businesses make the crucial mistake of taking this for granted, only to receive a financial jolt later. Some factors charge a flat fee and on a weekly basis with rates hovering around 0.5% per week. Of course, the total amount changes based on how long the customers takes to pay the invoice. A great way to get paid sooner and pay lesser fees is to provide discounts to clients that pay early.
13. Not Understanding the Fee Structure
Not understanding the fee structure can contribute to making all kinds of mistakes when invoice factoring. For best results, it is important that you understand percentages, appropriate terms, how the fee is applied, and the time value of money.
14. Failing to Inquire about Upfront Advance Percentage
As already mentioned, invoice factoring gives you an advance in exchange for your unpaid invoices. However, usually you receive about 85% of the invoice amount upfront instead of the entire amount. The pending amount is paid when the customer pays the invoice. This amount does not include the factor’s fees. You need to ensure that the initial amount you receive is adequate to fund your business operations. If it isn’t, consider other options, like shortterm loan, to get working capital.
15. Overlooking Minimum Requirements
While several modernday invoice factors enable you to pick the invoices you want to submit for financing. This choice is not offered by traditional invoice factors. In fact, you will need to factor all invoices from a specific customer or factor a set minimum volume of invoices each month. If the minimum limit isn’t met, you may be penalized. While some businesses are able to achieve this limit, others will naturally want more control over their factoring. The frequency and volume of your factoring should be considered when choosing the right factoring service.
16. Submitting a Haphazard Application
Getting funding through invoice factoring has one important requirement: an accuratelyfilled application form. Inaccurate information will delay your application and may even lead to a denial for funding. Do provide factual information about the type of business you run, your revenues and expenses, and the necessary details about your customers.
In order to increase your chances of procuring funding, you need to ensure that you take factor invoices only from reputed customers who have good credit scores and pay on time. Having a strong and favourable online presence will also up your chances. You can form an LLC or Corporation instead of sole proprietorship/general partnership to lend your business more authenticity.
17. Leaving Sections of the Application Blank
Another grave application formrelated mistake that is commonly made is leaving the sections blank. Missing information can never augur well with the concerned authorities, regardless of the reason. Not specifying requested information will lead to a delay in your application as factoring companies do not process it until they receive a completed application.
18. Entertaining Sluggish Customers
If you have habitually latepaying customers, they’re probably not a good fit for invoice factoring. That’s because invoice factoring companies get paid only when customers pay the invoice amount. Hence, invoice factors prefer to gauge whether or not your customers are reliable payers. Factoring invoices from perpetually late payers can adversely affect your application. Further, if your customer does not pay the invoice, you will have to cough up the money, which may be problem if you’ve spent/invested the advance amount.
19. Missing Directing Payment to the Factor
As mentioned, the invoice factor gets paid when the customer pays the invoice. This means the customer does not pay you, but pays the invoice factoring company . Modern factors try to make things as flawless as possible so that your customers can continue with their usual payments. Your business gets an account number and PO box address, which can be used to remit payment. These remittance details need to be passed on to customers, failing which your business can be heavily penalized. Further, the invoice factoring company may also choose to no longer associate with you.
20. Not Considering Your Credit Score
One of the biggest advantages of invoice factoring is that your credit score is of no consequence to its approval. It has more to do with the creditworthiness of your customers. In any case, you will only do well by building your credit score. Go through your credit reports periodically and review them for signs of danger, such as an impending bankruptcy, tax liens, unpaid debts, and so on. These can land you in trouble going forward.
21. Submitting Inadequate Supporting Documents
In order for your factoring application to be approved, it needs to be supported by several important documents, such as receipts and order confirmations. It is best to complete this process with the help of professional financing computer programs rather than submitting documents online or sending them through fax or mail. Such software can diminish the risk of rejection and also speed up the process.
22. Failing to Mention Other Liabilities
Several business owners make the mistake of not disclosing complete information about their debts due to the fear of their factoring application getting rejected. However, invoice factoring companies examine public records and database to double check whether or not a company owes debt or is a tax defaulter. Know that while your current liabilities may not be a problem, but concealing information can cause trouble for your application.
23. Not Reevaluating
Minimum Volume Certain invoice factoring agreements require that a minimum volume of invoices be generated each month. In such cases, not meeting the minimum requirements implies incurring minimum fees and higher expenses than the advertised rate, which can land you in a financial soup. It is, therefore, important to collaborate with a company that has nomonthly minimum requirements.
24. Not Noticing Hidden Fees
Several factoring companies attempt to increase their profits by levying certain hidden feessuch as credit check fees application fees, ACH fees, longtermcontracts, monthly servicefees, and monthly fees. In contrast, the rates they advertise are low. However, do not takethe bait and choose a factoring company that amply specifies its pricing structure.
25. Not Including Descriptions of Goods and Services Provided
A crucial factor that leads to delayed payments is when businesses do not include descriptions of goods and services they have provided to the client in the invoice. This can lead to misinterpretations and misunderstandings when the client tries to verify whether ornot they have already paid you. To avoid such situations, always include a brief description of each item in your invoice.
26. Directing Payments On an Already Factored Invoice
This could result in duplicate payments, which implies getting paid directly on an invoice that has already been factored. This is to be avoided at all costs as it is considered fraud. The invoice has already been purchased, and you are getting paid again for it. If this happens, your factoring company may lose trust in you, and you might also attract several penalties.
27. Failing to Specify the Terms
It is a good idea to use your invoicing to let your customers know about your terms, conditions and policies regarding payments and refunds, estimated delivery time, and other information. This is also a great way of keeping your customers abreast of the changes in your terms.
28. Not Reiterating Your Terms
It is extremely important to be specific in stating and restating your terms and policies. These could be anything, from revisions, refunds, returns to time frames. While you may have addressed these concerns in your initial agreement, you will do well to reiterate your policies and let the clients know what they’re paying for. Doing so not only prevents the possibilities of a scope creep, but also reflects your professionalism.
29. Including Unexpected Fees
Want to lose all your clients? If yes, one of the fastest ways of doing so is by including a list of additional charges that you never discussed with them to begin with. If your answer is in the negative (hopefully), make sure that they always know exactly how much they need to pay you by discussing all your policies and fees ahead of time. In fact, you can inform them of these factors even before you begin working with them. Explain your charges, additional fees, and other components before they accept your service. Itemizing can help you here.
30. Messing up the Invoicing Layout
As surprising as it may sound, a poor invoicing layout can easily project your company in bad light. Messy formatting, bad editing, spelling errors, and incorrect figures can not only make you appear unprofessional, but can also keep you from receiving your payments on time. Your clients will not take you seriously. It is, therefore, critical to design a great layout and verify all your invoices to detect and rectify such blunders before sending them out. Proofread, proofread and proofread!
31. Forgetting to Include Your Logo
Just like every other correspondence item that leaves your office, your invoice should also reflect your branding efforts and standard of professionalism. Do not forget to include your business logo on your invoices. Incorporate your web address and contact details in the footer as this will go a long way in imprinting your brand in the client’s mind. Make sure that you don’t go overboard with this, though. An invoice is, after all, a legal document. Do include your name and contact information so that your details are handy when clients want to get similar work done in the future.
32. Skipping Backing up Your Invoices
Your invoices are some of the most important documents for your business. It is recommended that you always back up your files, in case you need to refer to them later for tax and/or legal purposes. You don’t want to lose all your important invoices because your computer crashed or was attacked by a virus. This is why you need to back up your documents by storing them on multiple computers or on the cloud and in the form of hard copies.
Automated invoicing systems already save copies of your invoices. If yours doesn’t, take the steps necessary to get it to do so. Saving invoices helps in situations when you need to reissue them, address customer disputes, and do your own bookkeeping.
33. Not Following up with Late Payers
After invoicing your customers, you may have to follow up on them, especially those who don’t pay in time. It is important that you do so soon as possible, as not addressing your unpaid invoices for long periods of time can diminish your chances of receiving payment, and cost you heavily in the long term. It helps to have an effective collections strategy in place to mitigate this risk.
34. Not Stating the Due Date Clearly
There is no point in sending out your invoice on time if you don’t specify to your customers as to when you need to be paid by. Sending out an open ended invoice can prove to be disastrous, which is why every invoice should include a due date, even if it is months ahead. Also, refrain from using terms such as “To be paid in 15 days” and mention a specific date. An imprecise date may prevent your clients from taking it seriously and they might not stick to it. Instead, give them a more concrete deadline to adhere to.
35. Not Specifying the Mode of Payment
It is imprudent to assume that your clients will always know your preferred mode of payment because they won’t. You need to inform them that they need to pay you either by cash, check, through PayPal, or something similar. Online payments make the most sense, though.
36. Having Difficult Payment Methods
Taking a cue from the above point, you need to ensure that you make it easy for your clients to pay you on time. Use technology to your advantage and be open to accepting electronic payments. They’re easy, convenient, and time saving.
37. Fudging the Figures
There are several ways of pissing off clients, but one of the most annoying ways of doing so is by billing them incorrectly; that and receiving low quality goods and services! Fudging figures in any way can cost you. Undercharging your clients will not only lead to the waste of their time, but also bring you losses. Overcharging them, on the other hand, will leave clients fuming and you will lose them. Before dismissing numerical discrepancies as clerical errors, review the situation by checking if this has been happening regularly. You don’t want to ruin your reputation in the eyes of your customers. Have a dependable accounting system in place to help you add your invoices and prevent duplication.
38. Sending the Wrong Invoice
Few things are more infuriating for clients than receiving an invoice for items they never ordered or received. Such incidents cause nothing but confusion and waste everybody’s time. Further, wrong invoices will also lead to delayed payments, leave your business out of cash when you may need it the most, and even lead to a thinning bottom line.
39. Losing the Invoice
Maintaining the business’s financial records correctly is crucial to a company’s cash flow. It is, therefore, important that you have all your invoices in place. Losing invoices can be detrimental to your bookkeeping efforts and may cause you to lose track of your financial information.
40. Not Invoicing At All
This cannot be reiterated enough. Often, clients are extremely busy and have a lot on their mind. Due to their busy schedules, they may not always know exactly what to do with your payments until they receive an invoice from you. It is your responsibility go get paid for the goods and services you provided. Remember to send them an invoice without delay. Do not hesitate in sending them reminders about it if they aren’t paying up, fearing that you’ll come across as greedy. You need to protect your own interests. Don’t overdo it, though as that may just irk your customers.
41. Not Checking the Reviews, References of the Factoring Company
When you associate with a company and decide to work with them, it is best to ensure that they’re an ethical organization that stays true to their word. You can easily get such information by searching online. Go through several reviews and check with all available references to know more about the factoring company you plan to work with to avoid legal and financial troubles later.
42. Not Specifying the Payable Information Clearly
Make sure you emphatically and visibly specify the payable information (about whom to be paid to) on the invoice. Going wrong here will lead to chaos and delayed payments. That’s exactly what you want to avoid.
43. Mistakes In the Due Dates
Make sure to get your dates right if you’re serious about receiving timely payments. A lot of organizations make the mistake of entering the dates incorrectly, along with errors in mentioning the payment terms. This can prove to be highly detrimental to your financial interests.
44. Not Using the Right Name , Email Address To Send Invoices
As mentioned earlier, you do not want your invoices and other sensitive information to reach the wrong hands. It is easy to get mixed up with similar email IDs or get the spellings wrong. Make sure you get the names and email addresses of the concerned people correct.
45. Not Including Purchase Order or Job ID
Remember to include the purchase order number and/or job ID on the invoice. Some companies makes it mandatory to do so before they will pay you.
To err is human. While you may or may not have been able to save yourself from some of the above mistakes, chances are that after reading this post, you will feel more educated and empowered to enter into a factoring agreement with more confidence. You will know the red flags you need to look out for and act accordingly. As per the old adage, being forewarned is being forearmed, use the above information to prepare yourself before signing on the dotted line.