Things to Consider Before You Turn to SME Invoice Factoring
Invoice factoring is the ideal solution for an entrepreneur with a small budget. However, be aware that my personal experience suggests that in certain situations, it could be detrimental to the management of the cash flow of your company.
In the first place, do we have a clear understanding of what is invoice factoring?
Invoice factoring is a way to take over all tasks associated with the administration and management of the sales ledger. It includes the sending of invoices to clients in order to collect payments, as well as credit control. Additionally, the factoring firm will loan you up to 90% of the worth of invoices that are raised.
However, if the factoring firm discovers that your customers aren’t paying on time or within a certain period of time or aren’t “like” the clients they are dealing with, they could begin to restrict your advances from factoring. When your funds begin to become capped and with no alternative arrangement, the flow of cash will be immediately stopped, and you could end up in a stressful and challenging situation.
Consider your business right now and attempt to handle this issue before the situation begins to take control of you!
These are three aspects you need to think about and how they relate to the accounting of your small business.
1. You are not aware of the sales ledger’s process, and you will be dependent on invoice factoring
The challenge: Managing your client invoices and cash revenue could seem like a burdensome and non-priority task to you, particularly if you wish to concentrate on growing. Invoice factoring is an excellent solution, particularly when your expenses are paid at the beginning, e.g., temporary staffing agencies. When you hand over the task of processing to a third party, you are unable to keep track and understand who the bad payers are and the length of the cash collection process, and what is the actual need for working capital for your company. In the beginning stages of your venture, it may not be a concern for you, but as your turnover grows, the cost of factoring in charges based on your turnover will grow in proportion to. While 4% of PS100K might be reasonable, but however, 4% of PS2m is costly.
To handle this scenario, Take note of the length of time and what volume of turnover factoring cost, in actual dollars, will fall out of the market. Plan ahead an alternative plan of financing. Examine the conditions of your contract to ensure that you are able to make a switch at any time and avoid committing yourself for an extended period of time based on the assurance of a less factoring percentage now.
2. Insufficient response to queries and demand for credit notes.
The question could be that customers will contest or question invoices because of how you run your company? If many factoring services are employed, the service will be remote to your office. Anyone who calls with inquiries will likely be handled in a less personalized manner than if this task was done in-house. Customers who have questions about invoices usually do not receive a rapid amount of responses for copies of invoices or even for the credit notes that they have agreed to. The result is that the payment is delayed. This could affect the amount of your advance if the contract is that you advance up to a limit depending on the balance and age on the sales ledger.
To handle this issue to deal with the situation: Examine the response time of the factoring company dialing them up yourself. Are you happy that the person you are in contact with response to your questions as a client? Have you covered in the event that your contact is not in the business? If they’re not responsive towards you, then you could bet your customers will receive worse service. Also, check the ledger and your contact on a regular basis. What kind of queries and concerns is being raised by your clients? This could provide you with an indication of what isn’t working. E.g., Are customers always asking for invoice copies? Could this mean that invoices aren’t getting sent out promptly, if ever? Find out where you’ve requested an invoice for credit, and then what is the time frame to get the credit note approved and are you see it on your system. What is the primary method by which invoices and other supporting documents are sent to your clients, whether by either via email or postal mail and how long is it taking?
3. There are new customers that don’t have enough trading background.
The issue is that factoring companies are not a fan of new businesses when it comes to giving advances on invoices. Without a history of trading and no prior history of trading, they might decide not to factor in the invoices, but they will gladly take over the invoicing and control of the credit of their customers. All of this will be included in your monthly fee; therefore, make sure you know the criteria of the factoring company when it comes to factoring a company on behalf of you. If you’re paying to control credit, assure you that your factoring business is pursuing your invoices that are not factored with the same vigor as your invoices factored.
To handle this scenario In this case, if there’s likely to be some of your customers likely to not considered in, it could be worth taking control of your credit for your clients. When it comes to managing your cash, the customers you choose to deal with are crucial and will probably require more careful monitoring until you are sure they’ll adhere to the terms and won’t unnecessary withdrawal from funds in your reserve.
If not, you should check the time it takes for your factoring company to raise funds issue and receive payment from invoices that are not factored in. Examine the lead time that your invoice factoring firm believes it is able to achieve. Check with the client on the speed at which they have received the invoice. In the case of some of the largest factoring firms, they might not know their own business; therefore, don’t always trust what they tell you to do yourself checks.