When customers pay late and your business finds itself in a cash crunch, factoring can be a simple and convenient way to obtain immediate cash. However, it’s important to evaluate at least a few factoring companies and make sure you understand the terms before proceeding. This can help you to prevent several common mistakes. We highlight three of them below.
Submitting Purchase Orders Instead of Unpaid Invoices
Some business owners make the mistake of providing the lender with purchase orders because they confuse the term with invoice financing. Purchase order financing provides funds to companies that have ordered but not the cash to fulfill them. Invoice factoring, on the other hand, acts as a bridge between the delivery of a product or service and collecting the money for it. Once you receive approval, be sure to submit only the customer invoices you want to borrow against.
Not Redirecting Payments Properly
If your company receives payments from the customer, you must forward them to the factoring company to apply to the unpaid invoices. You could lose the trust of the company that loaned your business money as well as owe extra fees for not remitting the payments on time. Remember that the factoring company now owns the invoices and collects the balance and not your company. However, the customer usually doesn’t know that and is still your customer.
Not Understanding the Entire Contract
You may feel so hurried to get the money that you neglect to read the fine print on the factoring contract. That means you could end up surprised with additional fees or terms other than what you expected. If you don’t understand something in the contract, ask now before it becomes legally binding.
Sudden Rivers Capital Corp is pleased to offer the option of invoice factoring. Please contact us today to learn more.