A lot can go awry when a small business owner chooses the wrong invoice factoring company. One of the biggest concerns – and for good reason – is that you could lose key customers if the company you contract doesn’t do a good job of managing the factoring relationship with your customers on your behalf. That’s one of the main reasons why some small business owners decide to maintain credit control over their customers, instead of allowing a third party to chase them for payment (freeing up their time for other, more important business activities).
To prevent missteps from ever happening with an invoice factoring provider, there are a few proactive steps to take that begin with doing your due diligence. But first, do you know what invoice factoring is?
What Is Invoice Factoring?
Invoice factoring is a form of financing where a business owner sells invoices to a factoring company for fast access to funds. The business owner receives cash for the invoice amount, usually less any fees, ahead of the payment terms. The business owner’s customer, who is responsible for paying the invoice, instead pays the invoice amount to the factoring company according to the original payment terms. Invoice factoring also goes by the terms accounts receivable factoring or receivable financing. (It’s important to note that this is different from invoice financing, where a factoring company still gives a business owner cash for their invoice, but the business owner pays back the invoice amount themselves, plus a factoring fee. Find out how to choose between invoice factoring vs invoice financing.)
There are a lot of misconceptions about factoring that have given it a bad reputation. First of all, it’s not a loan; business owners don’t have to worry about paying the money back because their customer pays the factoring company. Most importantly, choosing to factor invoices doesn’t mean a business is struggling or can’t reliably serve its customers. Add to this perception that many traditional factoring companies charge hidden fees, don’t fund the full invoice amount, and take weeks to pay, and you can see why some people have a bad impression of the factoring industry.
Thankfully, the truth couldn’t be more different: Invoice factoring makes businesses more successful when they need to maintain their cash flow in the face of long invoice payment terms. (In fact, it often helps business owners stress less about their cash flow situation!)
When Should I Consider a Factoring Relationship?
If you’re tired of waiting on payments by customers, need cash to cover your operating expenses, or need funding to grow your business, you should consider a factoring relationship.
The reason there’s a demand for invoice factoring relationships is because of cash flow issues caused by long business to business (B2B) payment terms. In many industries, it’s not uncommon for standard payment terms to be anywhere from 30 to 120 days. Instead of business owners being paid right after they’ve delivered goods and/or services, they have to wait to receive customer payments.
This is a particularly difficult problem for small business owners who have large customers. They are excited to close a household-name customer for a large contract, but when they read the payment terms, they see that they won’t receive the money for months. This impacts their ability to maintain positive cash flow, not only making it difficult to run their business, but causing them anxiety. These small business owners need that money sooner rather than later to pay expenses, which can include:
- Making payroll
- Buying new equipment
- Paying their own suppliers
- Hiring staff
- Fulfilling large orders or projects
Those last two points are more common than you might think. With improved cash flow as the result of a factoring relationship, many small businesses find themselves able to bid on projects that will require them to buy lots of materials or labor. Companies that had to turn down business due to a lack of cash can take on the extra volume. If this sounds like a stretch, just take a look at our customer stories. Run Veggie and Global Pipeline are two companies who are particularly direct examples of growing with invoice funding.
How Invoice Factoring Affects Customer Relationships
There are a lot of misconceptions about the factoring industry that have given it a bad reputation. Thankfully, the truth couldn’t be more different than these misconceptions, and invoice factoring actually makes businesses more successful when they need to maintain their cash flow in the face of long invoice payment terms. Here are three common misconceptions about invoice factoring:
Myth #1: Customers may question the health of your company and no longer want to do business with you
If you work with larger customers, this will not be a problem because they understand the factoring relationship and know how critical it is to having reliable cash flow. However, some customers who don’t own businesses may not understand the rationale for using an invoice factoring company. Instead, they may see your action as your company going under and looking for a lifeline.
Myth #2: Customers may view you as losing control of your business
Customers want to know how a factoring relationship will impact the quality of service and products they receive. Because invoice factoring providers are collecting your receivables on your behalf, customers who do not understand the factoring process may view the situation as you losing control of your business.
Myth #3: Customers may view invoice factoring firms as debt collectors who will harass them
While there are some invoice factoring companies out there who are aggressive with collections, that isn’t always the case. It’s about educating your clients and helping to manage their perceptions of business factoring companies. Most factoring companies operate in an ethical and reputable manner — after all, they want to preserve the factoring relationship as well.
How to Manage Your Customer and Factoring Relationship
Your customers come first, so choose a factoring company with care. You want to find out things like how long they’ve been in business, customer complaints and commendations, ethical business practices, and do their values align with yours? Do your due diligence before you make a choice.
Communicate with your customers so they know what’s going on in your business. Misconceptions about business factoring are extremely common. In some cases, the easiest thing you can do to maintain your customer relationships is to simply explain why you’ve decided to use a factoring company and what it means for them. Tell them the name of the factoring company you’ll be using. Do this before the factoring company sends a notice to them. Alert customers to impending changes by sending out a newsletter, having an open house, or by hosting a virtual “town hall” meeting so customers can tell you what’s on their minds.
If you’re looking at dipping your toes into the world of invoice factoring and feeling a little overwhelmed right now – don’t worry. Like other online factoring companies, FundThrough offers a modern spin on traditional factoring relationships. You retain control over your business and cash flow while enjoying access to a suite of flexible invoice financing options that are designed to work regardless of whether you’re a new business that wants to maintain complete control over your accounts receivable process, or a large company looking for someone to do the waiting for you.
How FundThrough Works With Your Customers
We preserve your reputation as if it were our own — after all, part of being our client is making you look good to yours. Our onboarding process is designed for maximum ease and minimum customer involvement.
While redirecting payments by customers might be new to you, it’s business as usual for many large buyers. Our team already has strong relationships with many of the world’s largest buyers, and we take the time to get to know your customers who are new to us.
If you’re not sure how to introduce FundThrough to your customers, we’ve got you covered with handy scripts you can use.
Once you start funding, our team works directly with your customer to receive payment. This approach has the added value of effectively outsourcing your account receivables process so that you can put more time, as well as money, into growing your business.
We understand that the way we work with your buyers reflects on you, so we always interact with your customers in a positive manner. FundThrough will only contact your customer if payment is significantly delayed, and we will communicate with you in advance of making any contact so that there are no surprises.