Factoring Business Customer Invoices? Bad Idea. Here’s Why | Behalf

By January 29, 2017Factoring
factoring business customer invoices

Factoring Business Customer Invoices? Bad Idea.

Small business customers have unique needs. They need to cover operational expenses like funding inventory and make smart business purchases. Business customers use working capital to cover most of their business expenses, but their capital reserve is susceptible to slow seasons, emergencies, and dips in revenue. For any number of those reasons, your company’s business customers are not always able to pay their invoices on time. Your company may extend trade credit to account for your business customers’ occasional gap in cash flow, but trade credits are also problematic. Trade credits attract slow, non-paying customers to your company. As a result, your company’s outstanding invoices pile up and become a major burden on your cash flow. Your business customers’ financial woes becomes yours. You might consider factoring business customer invoices, but factoring is an entirely different beast. This article explains why factoring business customer invoices is a bad idea for most companies and offers an alternative.

Factoring Business Customer Invoices Strains Customer Relations

Customer relations are a delicate matter. Your company has gone to great lengths to secure its business customers and cultivate customer relationships. Factoring business customers will expose customer relations to unnecessary risk. Here’s how:

  • Business factoring Companies are Highly selective

Factoring companies do not factor just any business customer. They only work with business customers that demonstrate low-risk. Factoring companies look for customers that demonstrate creditworthiness and have a strong payment history. Depending on your clientele, that may only address a small portion of your company’s customer base. Factoring companies are sensitive to risk and closely examine the legitimacy of your company, as well as that of your business customers. Simply getting approved might be more than you bargained for and take more effort on the part of your customers than they are willing to provide.

  • Business factoring is Disruptive to the Customer Journey

Factoring business customers could damage your relationship with them. Remember it isn’t just your company and the factoring company in the equation. Once the factoring company purchases a customer’s outstanding invoices, the customer must pay them. Put simply, customers are handed off to the factoring company to complete payment. The transaction can feel disjointed if you do not transition them carefully. Customers can refuse to pay factoring companies because they do not feel comfortable paying anyone but the vendor directly. Your company must also be careful not to select the wrong factoring company. If the customer is not satisfied with the way the factoring company treats them, it can damage your company’s reputation and jeopardize your relationship with the customer.

  • Your Small Business Takes the Fall

In the end, factoring business customer invoices is a gamble. If customers fail to pay the factoring company, the amount they owe becomes your company’s burden. Besides the exorbitant rates and fees your company will owe for business factoring services, it will also owe the outstanding invoices that your customers never paid. Factoring business customers could leave your company in a worse position than it was from the start. Depending on how your company handles the debt, relations with those customers that did not fulfill payment with the factoring company may be unsalvageable.

If you are considering factoring your business customers, it is likely because you are looking to reduce your days outstanding among, if not all, at least a set of “problem” customers. If you extend trade credits, you no doubt experience slow-paying business customers. As outstanding invoices pile up, you may start to look for a way to speed up the process and free the cash that’s tied up in your company’s receivables. Business factoring is fast cash, but at what cost? A factor will skim a significant amount off your receivables and can strain your existing business customer relationships. Submitting the wrong type of customer for business factoring will literally cost you when they do not pay and you are left accountable. The factoring company might not approve your business customers because they do not meet their highly selective qualifications. If your customers are big brands with extensive credit history, this should not be of concern, but chances are you are trying to factor business customers that do not fall into that category.

Consider an Alternative

There are other ways to remedy payment delays. Consider offering your customers a purchasing line of credit that gives them the extended payment terms they need while ensuring you get paid fast at a low processing rate. When you accept payment on your customers’ Behalf, they can pre-qualify for up to $50k in funds and create their own payment plan with up to six months of extra time. They can use the funds to make larger, more frequent business purchases and regardless of the terms they choose, you always get paid in full within 1 business day. No paperwork. No recourse. No uncomfortable collections calls.

Learn more about how Behalf’s on demand payment tools are transforming the way small businesses buy and sell here.