Three common factoring mistakes
Factoring is a growing need for easy-to-understand financial services.
Many businesses today consider to use factoring services to improve their cash balance. What most businesses quickly realize when considering using traditional factoring is how much headaches the complex contracts can cause. In this article you can find three common factoring mistakes that you will face when using traditional factoring.
We at Advanon want to make invoice financing more transparent and easier to understand for you as a business owner, why we are implementing a simple fee structure. We also want to help you in the decision of what financing form is the best for you and your business.
Three common mistakes when using factoring
Being well-informed when making decisions on financing is crucial, as it can have major impact on the health of the overall business. Below you can find some common mistakes when contracting with a traditional factoring company that you should be aware of.
Factoring Mistake 1: Concentration limit
Factoring companies normally add a concentration limit to your contract, for example 10%. This limit means that only 10% of the invoices you sell can come from one customer. Although this might not seem as a big deal when setting up a contract, it can truly become a problem if the sales to one of your customers grow past 10% of your overall sales. Or even worse, that you only have large customer from the start.
Factoring Mistake 2: Only reading the first draft in detail
Factoring companies normally send their potential clients a first draft of an agreement that only contains a few bullet points. These can often look very attractive from a first glance. The problem is that when one has a look into the details of the actual contract, there are many additional fees previously not mentioned and now written in minimal text. Some of these are: service fees, credit check fees, notification fees, invoicing fees, administration fees, proposal fees, invoice processing fees, etc.
Factoring Mistake 3: Facility limit
Similarly to concentration limit, the facility limit can become a problem for a business with growing sales. Factoring firms often place a facility limit that says that you cannot sell invoices for more than a certain amount. For example, if you have a facility limit of CHF 80,000 (with an advance rate of 85%), and want to sell an invoice of CHF 160,000, you will not get the full amount. Due to your limit, you will only be able to get CHF 80,000, or an advance rate equivalent to 50% instead of the initial 85%.
At Advanon, our goal is to make the process of invoice financing as simple as possible for you as a user. That is why we are always honest in our estimations on what you can get, and keep the fees and structure easy so you can fully understand the full offer before agreeing to use our services.