Improve your chances for approval by keeping four qualifiers in mind when courting receivable financing:

1) What’s Your Type?

Factoring firms tend to specialize in certain types of invoices. They have fine-tuned their systems to fit a particular niche of the industry. If their specialty is medical factoring then they might not be into transportation factoring.

That’s why the first round of qualifying questions will include:

“What industry does the business work in? What are the goods or services they provide?”

While some companies offer funding on a variety of invoice types it pays to know any preferences upfront to avoid turndowns.

2) Size Matters

The size of a transaction matters to the factoring company. Make sure you know,

“What is the average monthly invoice volume and desired credit facility?”

Larger companies might require a minimum volume of $50,000 per month. If that’s the case then it’s better to send the smaller deals to a small business factoring specialist.

3) The Company They Keep

Good news! The credit worthiness of the business is not the primary concern. With invoice funding new businesses and other companies deemed “unbankable” are able to access working capital.

That means the main focus is shifted to the quality of the customer paying on the invoice, leading funders to ask:

“Who are the customers and how long do they take to pay?”

A factoring company generally likes to see customers or debtors paying on invoices in 30 days, although some will accept 60 to 90 days. They will look to the credit of the customer and ask for an accounts receivable aging report. If the risk of timely payment seems too great they could decline funding invoices owed by a particular customer or altogether.

4) Let’s Be Exclusive

Factors provide working capital with an advance on invoices. They need to know they are first in line to receive payment on the account receivables purchased. They’ll want to know,

“Has the business obtained prior financing with another company?”

They are trying to determine if existing claims have been filed against the receivables, making a lien search a standard part of underwriting. If it reveals there is already a UCC-1 Financing Statement of record the factoring company will want it terminated or subordinated by the creditor.

It pays to be prepared. Whether business owner or factoring broker be sure to know the answers to these questions. Then do your homework so the funding request goes to an investor that fits the deal. It will save you and the factoring company time, frustration, and rejection!

The “Dilemma”

The exchange started with a simple post from a factoring broker that had a “dilemma” with a new soon-to-be client.

In going over the client’s information, the consultant discovered that the client really did not need factoring help. He had two other alternatives that were clearly better choices for the client , with no additional risk.

The consultant was concerned how he was going to keep is his client focused on factoring so he could get the deal. “Any feedback would be helpful.”

Enter the “Expert”

The post was almost immediately replied to by a so-called “industry expert” that had been involved with similar negotiations (all going his way of course).

His advice bordered between “bait and switch” and “smoke and mirrors.”

Seriously?

In the ongoing posts back and forth neither of them ever considered actually telling the client that there were better options available.

What? Risk losing the deal in exchange for taking the professional higher ground?

Yes, and here is why…

1. The client is going to find out anyway. When they do, you are going to look like either an idiot or a thief. Ok, maybe those sound a bit harsh, but you will probably be viewed somewhere in the not so favorable middle.

2. They have friends to send you. Your “missed opportunity” with this client could come back ten-fold if you actually help your client. Trust me, he is going to tell every one of his colleagues about you. You saved the day, even if it didn’t involve invoice factoring. Who do you think his friends are going to call?

3. They have friends to steer away from you. Same as the last point, but in a bad turn of reversal. Remember, he will find out what happened, and will be sure to tell his friends if he thinks you purposely didn’t help him in order to make a few bucks.

Look, the rule of thumb is simple…

Always do the right thing.

Help your client in any way, shape, or form that you can. If it involves factoring receivables and you get a commission on the deal – that’s great!

If it doesn’t, but you are still able to help, just consider that you put some future business on lay away – maybe it will show up just in time for the holidays!

Well we found several “must have” factoring broker kits while researching our updates for the 2010 Factoring Directory.

And the best part is I’m going to tell you where to download two of them today for free!

At a minimum a factoring broker kit should:

1. Detail the types of accounts receivables a factor will buy
2. Outline the minimum qualifications for a business seeking invoice factoring
3. Provide the application for registering as a factoring broker

But sometimes a company goes a step further by providing that little something extra to help you succeed as a factoring consultant. They know if you find more deals, then together you can both make more money helping clients find working capital. These additional resources include:

• Where to Find Factoring Prospects and Referral Sources
• How to Answer a Business Owner’s Objections to Factoring
• Sample Marketing Brochures
• Scripts for Contacting Business Owners

So, where do you find two of the factoring broker packages that meet and exceed our expectations? Just follow these links:

http://www.hamiltongroup.net/brokers/index.html

http://www.paragonfinancial.net/toolbox.asp

These broker packages are like mini “how-to” factoring help courses for finding and developing clients.

Looking for more great resources, factoring services, and funders? Be sure to grab your copy of the new 2010 Factoring Directory.

First, let’s define the differences between Factoring and PO Funding.

Factoring: The purchase of business to business INVOICES (or ACCOUNTS RECEIVABLE) at a discount for services rendered or products delivered

PO Funding: The advance of cash against a PURCHASE ORDER or CONTRACT so the client can source the product or the raw materials needed to create a product, in an effort to deliver to the end user. In some cases, PO Funding is needed to hire employees or source equipment needed to fulfill a contract.

As you can see from the definitions, Factoring involves funding AFTER performance of an obligation and PO Funding requires funding PRIOR to performance.

Ok, so, now put your funding hat on  – would you advance money to a client and HOPE they end up performing so you can get paid back? Or, would you prefer to fund them after they have performed? Ask yourself these questions:

• If I advance my client the money and the very next day they go out of business, will I get paid?
• How can I be assured that they will perform?
• Does the client have enough money to pay me back in the event that they are unable to perform?
• What happens if the end user (debtor) cancels the order after I have advanced the money?

Certainly, there are more questions to ask, but, I think you get the point.

So, with that said, why do funding sources offer PO Funding? Well, we offer this in certain situations. First, we would never provide PO Funding for a service contract, nor, would we provide PO Funding when the money is needed to purchase raw materials. We do provide PO Funding when the transaction involves the purchasing of finished goods. Let me give you an example:

Our client is in the Apparel business. The client receives a Purchase Order from a large retail outfit (lets say Macy’s) for 1,000 Silk Shirts. Our client needs to source the shirts from a manufacturer in China. China refuses to ship the product until they receive a Letter of Credit or Cash.  Millennium is approached with this opportunity. Millennium provides the letter of credit needed and China ships the shirts directly to Macy’s. Our client creates an invoice to Macy’s and Millennium now factors the invoice.

To summarize, when you are approached with a potential PO Funding opportunity, ask the client the following questions:

• Is the funding needed to source finished goods? -  if the answer is no, no deal
• Do you have a history of managing these types of transactions -  again, ask yourself if you would fund someone that is doing this for the first time?
• Do you have any current outstanding Accounts Receivables (Invoices) that my funding source could finance against as extra security -  if they don’t, most funding sources will run away.

In conclusion, many times prospects feel they need PO Funding when all they really need to do is factor their current invoices to free up the cash needed to pay suppliers. Ask the right questions and you will save a great deal of time and energy in the future.

Timothy J. Sardinia – Mr. Sardinia is currently a Partner with Canfield Capital Management, LLC, a Member of Steelkilt, LLC, a Member of Millennium Automotive Group, a Member of Millennium Legal Funding. Tim can be reached at tim@millenniumfunding.com or by calling 716-204-4800.

Did you then wonder why a factor would ever consider funding a company that a bank would decline? If you have, believe me, you are not alone (I get asked this all the time). Let me see if I can help clear this up.

Let me begin by defining a strong banking prospect:

• Prospect has been in business for a minimum of 2 years
• Prospect has audited financial statements reveal solid profit margins in the previous 12 month accounting period
• Prospect has steady revenue growth with no “Peaks or Valleys”
• Prospect’s management team is strong with a proven track record of success in the industry
• Prospect has absolutely no bankruptcies or judgments in the past
• Prospect’s business collateral specifically, liquid assets (Accounts Receivable and Inventory) are sufficient enough to cover any risk of default

Now, let’s move on to defining a strong factoring prospect:

• Debtors (clients) of prospect have a positive credit history
• Debtors are multiple – no concentration with any one client
• Debtors will verify that product or service has been received and there will be no setoffs against payments

Can you see the distinction?

While banks make their credit decisions by focusing on the PROSPECT, factors make their credit decisions by focusing on the DEBTOR(S).

Although the comparison seems simple in nature, the impact of this difference is monumental. For example – Will a bank fund a new start up company (No – see point #1), will a factor (Yes); Will a bank fund a company that had loses in the past 12 months (No – see point #2), will a factor (Yes); Will a bank fund a company that is growing rapidly and needs a steady flow of cash to manage its growth (No- see point #3), will a factor (Yes).

The next time a prospect tells you to “not waste your time, I am not bankable”, tell them “I know, we have been waiting for you!”

Timothy J. Sardinia – Mr. Sardinia is currently a Partner with Canfield Capital Management, LLC, a Member of Steelkilt, LLC, a Member of Millennium Automotive Group, a Member of Millennium Legal Funding. Tim can be reached at tim@millenniumfunding.com or by calling 716-204-4800.