Most B2B businesses have a similar and common problem: trouble collecting invoices, leading to a lack of cash flow. There are several ways to address this issue, one of which is undergoing the invoice factoring process. Invoice factoring is when a business sells their outstanding invoices to an invoice factoring company. They will buy them for about half the cost of the invoice and keep the remaining in reserve until they have collected on the invoice. Once the invoice has been paid, they will then give the remaining half back, minus what you owe them for their work and services.It’s surprising that so many businesses choose to go this route, since this means that you will never collect on the full amount of an invoice. For example, if you have an invoice you are trying to collect on worth $1,000 you will not collect $1,000 by the end of the invoice factoring process. You will be charged a 3% factoring fee ($30), a 2% reserve account fee ($20), an invoice fee ($1.50), leaving you with only $948.50. If this occurs on all or most of your invoices, it adds up and you will quickly see that you have lost over $1,000 or more.

So, how can you avoid invoice factoring? We have a few tips.

INVOICE EARLY

A common problem that many businesses have is that they aren’t sending invoices early enough. An invoice should be sent to a customer immediately upon receiving the product or service. The longer you wait to invoice, the longer you will wait to receive payment. When a customer is waiting a month to receive an invoice, they likely have forgotten about it and will take longer to get cash in order to pay for it.

FOLLOW UP WITH PHONE CALLS

Phone calls are the best way to get in front of the customer and collect their payment faster. It is easy for a customer to ignore an email or letter, or simply forget about it, but a phone call forces them to make a promise to pay. Follow up all email you send with a phone call to make sure the customer received it and to ask for a deadline you can expect to receive it. For more details see our accounts receivable tips for collecting.

HAVE A SET PAYMENT POLICY

All of your accounts receivable team members should know what your policy is for late payment, and they should make it clear to your customers. If not every customer is given the same net days and the same late payment charges, then you will clearly have some that will never pay on time. Make your late payment policy across the board for all customers and make sure that they are aware of all consquences.

TAKE ADVANTAGE OF TECHNOLOGY

There are tons of different accounts receivable and invoice software options. If calling every customer and sending out every invoice on time sounded like an impossible task, it would be if you’re doing everything manually. However, if you can automate the invoicing process, you would have more time to make the follow up calls you need, helping you eliminate the need for invoice factoring.

You can easily avoid invoice factoring if you were able to create a more personal relationship with customers. The more they are able to have a conversation with you, the more liable they will feel to pay on time. There is no reason you should be giving away 50 dollars of every invoice so that an invoice factoring company can do the exact steps we listed above.