Watch out for Sneaky Invoice Factoring Tricks!
August 10, 2016
Invoice factoring can be a great financing option for your growing company. Factoring can get money into your bank account faster and make your cash flow much more predictable. Predictability lets you stay current on your payroll and tax obligations, make your payments to vendors on time, and concentrate on running your business, rather than chasing down receivables.
However, not all invoice factoring companies are interested in playing fair.
Like most industries, invoice factoring is made up of responsible, ethical, business people who do the right things and serve their clients honorably. But, as is the case anywhere, there may be players who will sometimes not act in their customer’s best interest.
In particular, one invoice factoring trick involves a factoring company “sitting” on a received payment for a few days in order to accrue additional fees to be paid from funds held in escrow.
Don’t commit to an invoice factoring company unless they’re upfront about the fine print.
Let’s say you elect to factor a $25,000 receivable. The transaction might break down as follows:
(Note: Advance rates and financing fees are samples. Actual rates and fees will vary.)
- Receivable Amount: $25,000
- 85% Advance: $21,250
- Less Initial Financing Fee: $875
- Advance to Your Company: $20,375
- Amount Held in Escrow: $3,750
If the invoice is paid on time (30 days), the full amount in escrow ($3,750) is paid to your company.
Here’s where things can get a little sketchy.
If the invoice is paid after 30 days, an additional $438 (half of the original financing fee) is charged for each 15-day period, or part thereof, that the invoice remains outstanding. So, in this example, another $438 would be charged if the invoice were paid after 45 days. These additional fees would be applied to the funds held in escrow.
Make sure all of these terms are acceptable, standard, clearly defined and explained to your satisfaction before you enter into a factoring arrangement.
Protect your money by NEVER working with a factoring company who does this:
Again, most factoring companies do things ethically, and when transactions are handled correctly, the arrangement is fair to everyone. That said, here’s what to look out for.
Assume your client pays your factoring company 28 days after invoice. That’s less than 30 days and is therefore considered on time. However, a dishonest factoring company – again, they’re in the extreme minority – could wait until day 31 or 32 before marking the invoice as paid, and deduct an extra $438 from your escrowed funds before reimbursing you.
The same thing could happen if a payment comes in at day 43 or 44 and the company does not acknowledge receipt until after day 45. This delay would mean a total of $875 in extra financing fees. And remember, you’re charged the fee for the entire 15 day period, regardless of when the payment is actually received.
4 Tips to Avoid Tricks by Sneaky Invoice Factoring Companies
- Ask for Referrals. Remember what they say about an ounce of prevention. If you’re careful about who you work with, you’re much less likely to run into trouble later. Ask your accountant or another business associate you trust to recommend reputable factoring companies. After speaking with each factoring company, ask for the contact information of current clients.
- Ask for Documentation. If something seems suspicious, it’s okay to ask if there’s been a mistake in calculating the fees you have paid. For example, if a long-term client has been known to occasionally be five or six days late, but never as much as 17 or 18, you should probably make a polite inquiry. Ask when the factoring company marked the invoice as received and for verification of when the funds were deposited to its bank.
- Ask the Source. If payments are posted as late, consider calling your client’s accounts payable department. Explain that you’re working out some kinks in your receivables and banking arrangements and were wondering when the payment was authorized, signed and sent. If there’s more than a three business day gap in mail-to-deposit timeline, you should ask the factoring company for clarification.
- Bank Lockbox. Only work with a factoring company that uses a bank lockbox, not a PO Box. Bank lockboxes time stamp all payments and you can request a copy of a check from the bank lockbox the event that you are concerned. Factoring companies know this and an ethical factor will provide time stamped checks upon request.
Although dishonest factoring businesses are rare, it always pays to be proactive and aware.
Remember, the factoring business is overwhelmingly represented by responsible professionals who understand that they can only succeed if their clients succeed, and that the factoring transaction is based on a level of trust that must be established with every customer.
That said, make sure to do your due diligence, and be prepared to ask questions if you think you’re not being treated fairly.
Stop waiting 45 or 60 days for payments! MP Star Financial can help you get a better handle on your company’s cash flow management. Call for more information. 800-833-3765 Ext. 150.