5 Most Common Invoice Factoring Problems | Behalf
5 Most Common Invoice Factoring Problems
Finding the right cash flow solution is a challenge, especially for companies that extend trade credit to their customers. Trade credit attracts slow and even non-paying customers to make purchases when they don’t really have the means to pay for them. Companies that extend trade credit tend to accumulate outstanding invoices and tie up their own cash flow. With their accounts receivable department in distress, they seek external financing solutions like invoice factoring. They sell their invoices to factoring companies that offer cash advances to temporarily relieve their business’s financial woes.
While invoice factoring is an attractive financing option to merchants that are impatiently waiting for customers to honor their trade credit, it can be more problematic than it is beneficial. Depending on your company’s customer base, invoice factoring is not always effective. Companies experience invoice factoring problems when their customers aren’t compatible with the factoring process. It is notoriously expensive for the merchant and it can unnecessarily strain customer relations. Before your company commits, you should consider the possible invoice factoring problems it might face. This article discusses 5 of the most common invoice factoring problems companies experience.
1) Customers are not Creditworthy
A factoring company will evaluate each of your customers to determine whether they are creditworthy enough to factor. This is a time consuming, paperwork intensive process for you and may not yield the relief you are expecting, depending on the financial health of your customer base. If your invoice factor refuses the majority of customers you want to factor, this is an invoice factoring problem that is beyond your company’s control. If the factoring company rejects a substantial amount of your customers, then it can worsen your financial predicament due to both the time lost and the rate that factor then charges you on the balance of your customer receivables. Most receivable factoring pricing is based on the entire customer portfolio, so the bad apples really can spoil the bunch.
2) Invoice Exceeds Credit Line
Another invoice factoring problem that leaves your company helpless is if the invoice is too large. In some cases, the total amount of an invoice you would like to factor is larger than the amount the factoring company has approved your company or customer for. This is particularly troublesome, since the large outstanding receivables are often the ones that hurt a company the most.
3) Customer Refuses to Comply
Your company can experience factoring problems when a customer refuses to work with the factoring company. Some customers are uncomfortable with the idea of sending their payment to a factoring company. They could refuse to pay the factoring company for a number of reasons; perhaps, they prefer to pay their vendors directly. If the customer is slow to pay and will not allow their invoices to be factored, your company is right back to where it started.
4) Cannot Factor Incomplete Order
In order for factoring companies to accept invoices the order must be complete. In other words, the goods must be delivered and the services provided. Invoices are only available for purchase once they are completed. Factoring problems arise when services take longer to complete than your company bargained for, so they must wait longer to receive financing.
5) Can’t Verify Invoice
Factoring companies typically verify invoices before they finance them. The verification steps ensures that goods and services are provided satisfactorily before they accept payment for them. This protective measure works in the customer’s favor, but they can also abuse it. Customers can refuse to verify invoices at their own discretion; in which case, the factoring company can decide whether or not they will factor it. You can negotiate with your customer and get them to cooperate but it can foster tense customer relations in the future.
If your customers are not compatible with invoice factoring, there is ample opportunity for factoring problems to arise. Invoice factoring is supposed to be a solution, don’t let it complicate things further. If you are confident that your customers are creditworthy and comfortable with the idea of your company factoring their invoices, you can proceed with caution. If after reading this article you are less sure about how invoice factoring will affect your customer base, consider an alternative. Behalf is a way to offer your customers a purchasing line of credit, giving them the extended payment terms they need while ensuring you get paid fast at a low processing rate. When you accept payment on your customer’s Behalf, they get 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 businesses buy and sell here.