I have written this article to provide you with straightforward information about some of the criteria that factors consider when qualifying a prospect prior to entering into a financial relationship with them.
Let us face it, your time is valuable, and you do not want to waste it filling out applications or conversing on the phone when you may be able to identify issues in this article that would preclude you from entering into a factoring relationship.
Additionally, I wrote this article because we want your business but want to earn it.
Therefore, if you find that this information is beneficial in your search for a financial solution for your business, we would welcome the opportunity to connect you with one of our highly recommended factoring companies. Even if you are unable to qualify for factoring at the moment, you may be able to resolve the issues and qualify later. We would also welcome the opportunity to assist you in resolving your working capital issues at that time.
While some of this information will be elementary and you may already be familiar with it, others may be unfamiliar. Simply read the article and I am certain you will discover some useful information.
We would like to begin by expressing our gratitude for the opportunity to serve your company. Let us begin.
Consider the following definition of factoring:
Factoring is a type of financing in which a business sells creditworthy commercial receivables to a financier called a factor.
This is an excellent place to start; you should be billing creditworthy businesses for your product or service. Your product or service must be delivered (no pre-bills). If they are uncreditworthy and you are already experiencing collection difficulties, a factoring company will decline to purchase those receivables. You may require the services of a collection agency.
How much revenue do you generate each month:
If you invoice less than $10,000 per month, the number of factoring companies willing to work with you will be limited. If you are speaking with a factor, inform them upfront of your monthly volume and inquire about their willingness to work with businesses of your size. This may prevent you from completing an application and wasting time on that particular factor.
How many invoiced customers do you have:
Factoring companies prefer to fund businesses with multiple customers; this reduces their risk. If you have only one customer, factoring will have a concentration problem, which means that if your customer defaults, you will have no other receivables from other customers to recoup your money. Notify the factoring company of this as well. Certain factors will not apply to you if you have only one customer. (This is beneficial if your single customer is large and stable.)
Do you currently have any financing in place:
If you already have a loan or line of credit, you should determine upfront whether the bank has filed a UCC-1 against your receivables. To enter into a financing relationship with your business, the factoring company must have first position on your receivables.
I would suggest that if you currently have a loan or line of credit, you double check and confirm this.
Numerous businesses have informed me that the bank did not accept their receivables as collateral and then proceeded with the application process and returned the contract.
The factoring company would conduct due diligence on the receivables, and the lien search would reveal an active UCC-1. Often, the customer is unaware that the bank has filed a blanket lien against their business, covering all assets, including accounts receivable.
In this case, you may still be eligible for factoring. If your loan or line of credit is small enough, the factor may be able to repay it from your first advance, forcing the bank to subordinate (release) the receivables. If not, they may have sufficient collateral to allow the factoring company to take first position on the receivables, allowing you to obtain the capital you require for your business.
Therefore, if you have current financing, you should investigate this matter. You may discover that the bank will step up and provide you with additional funds when they become aware that you are about to depart.
This has occurred numerous times.
Additionally, keep in mind that our factoring companies can assist you in negotiating a subordination agreement; therefore, discuss this with us if you require additional clarification on this subject.
Your report on aging:
Your aging report is critical to a factoring company; it serves as a barometer of your cash flow. A detailed accounts receivable aging report that is accurate should be aged from the invoice date, not the due date. Certain accounting software packages are configured to age receivables from the due date; this results in an inaccurate report to the factoring company.
If your aging report is unhealthy, you will have a difficult time qualifying for factoring. Additionally, the fees you pay to a factor increase as the number of days past due increases.
Ascertain that you are experiencing a cash flow problem and not a collection problem.
Bear in mind that creditworthy customers are critical.
Taxes, liens, judgments, litigation, felony convictions, or bankruptcies that remain unpaid:
If you have any of these issues, it does not mean you are ineligible for factoring; you simply need to be upfront and determine whether the issues are too complex for the factoring company to resolve. This could save you time.
Are you an incorporated business:
Certain factors do not apply to sole proprietors, while others do; we have some that do. Determine this at the outset of the conversation.
Certain factors will necessitate the submission of financial statements, while others will not.
Providing financial services is typically where the most aggressive rates are available.
If you do not wish to deal with financial statements, inquire upfront as to whether they are required. We offer programs that do not require financial information.
While the primary focus is on your customers, your personal credit is considered. If your personal credit has taken a significant hit recently, discuss this with the factor upfront to determine the extent to which it will be considered.
This covers some of the fundamentals; I hope it was helpful!
We appreciate your time in reading.