Cash is always in demand so there’s no shortage of companies that can benefit from the business funding factoring provides. The greater challenge is finding a business that is likely to receive funding from a factor. Ask these 4 questions to identify a good candidate for factoring accounts receivable:
1. Who is the Customer?
A business that sells to the government or another business will make the strongest factoring client. Most investors do not factor invoices that are paid by an individual consumer.
If marketing to companies as a factoring broker that means to generally avoid retail stores and any other direct to consumer type business. Instead target a company with business-to-business or business-to-government invoices to satisfy the preference of factoring companies.
2. Does the Customer Qualify?
A factoring company looks for payment from the customer that owes money on the invoice. This debtor must be credit-worthy to qualify for an advance on the invoice. As part of the screening process the factor will review aging reports and a credit history on the debtor.
Unfortunately, many businesses are not sure if their customers are good credit risks until they don’t receive payment and it’s too late. Using the factor to pre-qualify customers before extending payment terms can be a benefit to the business in addition to the immediate cash advance (more details at How to Be Sure Your Business is Paid).
3. Does the Invoice Qualify?
In order to advance funds on accounts receivable the goods or services must have been delivered. A factoring company won’t discount an invoice if there is still work to be performed or product to be delivered.
The invoice also must be free of any offsets. An offset is when a customer can claim a credit against the money they owe for some reason.
4. Will the Business Prospect Benefit?
If a business is receiving payment immediately or within 10-15 days they may not see an advantage to factoring. However a company that is waiting 30 or more days is more likely to need and recognize the benefit of receiving an immediate cash advance.
Startup companies, fast growing industries, and those not yet considered ‘bankable” by business lenders often benefit from factoring. They have cash needs for bills, payroll, overhead, and expansion that are not being met through traditional business loans or lines of credit.
Whether considering factoring for your own business or marketing to businesses as a factoring broker, the answers to these questions will help determine if factoring account receivables will be a viable solution.
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