What is invoice factoring?
Invoice factoring is a financial tool for businesses looking to improve their cash flow. With invoice factoring, a business trades its unpaid bills with a factoring company in return for cash equal to the invoice value. 70-90% of the funds are paid upfront, which businesses use to resume their operations. The remaining funds minus the fee(1%- 5% of the total invoice value) are paid when the factoring company collects the remaining unfulfilled payments from the customers.
The process of invoice factoring
Let’s go through the process of invoice factoring to help you understand it better
- You provide services and products to your customers.
- When all the products are delivered, you generate an invoice for the customers to pay.
- You need funds to resume your business operations but most of the bills will take time to get fulfilled by your customers.
- Instead of waiting for your customers to pay, you sell the unpaid invoices to a factoring company.
- The factoring company provides you with a major portion of the total invoice value at once.
- The cash flow of your business improves and your customers pay the unpaid invoices directly to the factoring company.
- After collecting all the invoices, the factoring company deducts its fee and sends you the remaining balance of the total invoice value.
Challenges in managing customer relationships
You can improve your cash flow significantly by using invoice factoring but here’s where another factor comes into play: the factoring company collecting the invoices directly from your customers.
Confusion about the third-party
Customers might get unsure about why are they paying their invoices to a factoring company and not directly to you.
Risks to loyalty
The loyal customers of your company who are used to dealing with you might feel uncomfortable with the involvement of another company in the payment process. This could negatively affect customer loyalty and trust.
Perceived financial instability
Customers might assume that your business is not doing well, that’s why you are using a factoring company. It could build a negative image of your company in front of your customers.
5 Strategies to Efficiently Manage Customer Relationships
Here are some strategies that you can use so that your customer relationships don’t get strained in the process of using invoice factoring.
Transparency
Transparency is the most important strategy. Inform your customers about your decision to partner up with a factoring company to manage your funds efficiently. Go about it smartly: ensure your customers that this financial decision will help you keep providing flexible payment terms to your customers. Also, ensure your customers that business policies and product quality will remain the same and that it’s just a financial decision taken by your business.
Build trust
Customers might interpret that invoice factoring as a sign that your business is in financial trouble. Make sure to counter that idea and state that your business is not financially struggling and invoice factoring is just a way to optimise your business operations. Doing so will build trust with your customers when they know that they are dealing with a financially healthy business.
Be proactive
Communicate with your customers before the factoring company deals with them to collect the unpaid invoices. This will save your customers from getting a surprise when you have already communicated and answered their queries.
Maintain your high service standards
Even with a factoring company getting involved in your business payment operations, make sure your product and service quality remains unchanged. When you continue to provide excellent services to your customers, they will have less room to complain about the payment process or anything else.
Choose the right factoring company
Choose a customer-friendly factoring company. The best way to go about it is to research well about the factoring companies operating in your business industry. Before choosing one, review feedback and testimonials from previous clients. This will help you get an outlook on how the factoring company operates and interacts with the customers. Additionally, you can bring this point in discussion with your potential invoice factoring provider. Ask the factoring company directly about their strategy to go about dealing with customers and see if it matches your business needs. You could also reach out to ComparedBusiness to help you choose the best factoring company suited to your business.
Invoice factoring can prove to be a smart financial strategy for your business. The factoring company takes on the process of payment collection so you can continue to focus on your main business operations. If you face challenges with your customers during the process, the above-mentioned strategies will surely help you counter these challenges.
