Prospect Yellow Flags: Factoring Deals to Approach with Caution

factoring prospect yellow flagLast month, we covered a number of red flags for factoring brokers to avoid when working with a prospect. Besides those “back away now” situations, there are other things that can complicate your efforts to find a factoring company to work with the lead.

While these are circumstances that may be resolved favorably, it is still worth your time to gather all of the information you can before investing your efforts in placing the deal.

If you encounter the following situations, proceed with caution:

Bad personal credit (with or without liens)

To place a deal where the prospect has poor personal credit, you have to know which of your funders is willing to work with those deals. Tax liens fall into this category as well: because the federal government holds first position on any lien filings, funders will turn down a prospect with a business tax lien.

A personal tax lien may not prevent a deal from being done; however, it does become extremely difficult to close. More questions are necessary – find out how much the lien is for; whether there is a payment plan in place; and, most importantly, if their business is incorporated (more on sole proprietors below).

Sole proprietors

Incorporation is critical to protect a business’ interests from any personal issues its owners may face. Many funders will turn down sole proprietors because of the complexity involved in accurately tracking personal versus business taxes and the threat that a personal tax lien can pose to the factor’s interests. It isn’t impossible to place a sole proprietor, but these deals have a much better chance of closing if you can convince the prospect to incorporate first.

Service providers using “independent contractors”

Some funders love deals involving independent contractors, while others don’t. On the plus side, using independent contractors exempts companies from payroll taxes and other expenses involved with permanent employees. However, misclassifying workers as “independent contractors” and then treating them as permanent employees can subject a business to heavy fines from the IRS. Ask the prospect for a copy of their contractor agreement and evaluate it using the IRS’ criteria for independent contractors to identify any areas of concern.

Prospects looking for spot factoring

As appealing as spot factoring may be for some prospects, it is equally unappealing to many funders. Even a factor that agrees to do spot factoring will likely only approve larger invoices that provide a decent payout for the legwork involved. If you don’t have a guaranteed funding source for spot factoring deals, it would be best to steer clear of them entirely.

Start-ups

Start-up companies often come with one or more of the previously mentioned yellow flags. Many are in the early stages of incorporating and their owners may have poor credit that keeps them from securing working capital. As with spot factoring deals, you should step back if you do not have a relationship with at least one funder that willingly works with start-ups.

Factor Finders Factoring Broker Program

Ultimately, with every deal you touch you have to decide how much effort it is worth on your part. The “work it ‘til it’s dead” philosophy is admirable, but if you continue to work deals that are already dead in the water then you will severely limit your earning potential by passing on bigger, better, and easier deals. The biggest advantage you can give yourself is to learn as much as you can about a prospect before making any calls.

That said, not every waving flag should mean a lost deal. We recently added a number of unsecured business lenders to our network of funders and can now suggest unsecured business loans to prospects whose deals are not factorable for many of the reasons listed above. Unsecured lending is another source of fast funding for companies in need, and by working with these funders you have the potential to close more deals.

What other yellow or red flags have you come across when working with a prospect?

About the Author: Factor Finders specializes in finding factoring companies that can fund difficult-to-place deals. Our services help other factoring brokers capitalize on commissions that might otherwise be lost.

If you have a prospective transaction that you cannot find a funder then contact us at FactorFinders.com. We’ll find the factor for you and split commissions 50-50.

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