One of the reasons why I enjoy working in the factoring industry is that almost every day presents a challenge when it comes to looking at prospects and finding new ways to close a deal.
As great as that sounds we all know too well that most prospects do not make it past the application review to the due diligence process. In many cases we find the applicant needs some other type of financing or they have some past derogatory issues that cannot be cured.
In previous articles I’ve focused largely on the due diligence side of evaluating new deals. It is worth repeating and I cannot stress how important it is to have a strict set of underwriting guidelines that protect your company from the risk associated with funding invoices. Whether it’s having an ironclad factoring agreement, a consistent credit policy or just a standardized factoring checklist, a good factor should always update and review their due diligence procedures to ensure consistency.
But what about factoring brokers? How can they work to bring good prospects to factors?
Most factoring brokers do not have a due diligence process in place since they do not fund deals. It wouldn’t make sense for them to incur the cost of running credit reports or tax searches on prospects. In most cases the broker will either use the factors application or their own when trying to get new business.
Does the broker’s role end there? For us, successful brokers usually have several key qualities that result in more closed deals.
First, they understand the factoring business.
Although no two factors are exactly alike a typical factoring transaction involves an advance, discount fee and rebate. Obviously there will be differences among factors in amounts advanced, fees charged and so on. Since there are many prospects that are not familiar with invoice factoring, a good broker should be able to explain how a typical factoring transaction works from the advance to the rebate. If a broker is working with several factoring companies that fund different industries they should be knowledgeable of the nuances and what is generally required from each. For example, a medical receivables factoring company will most likely have a different set of requirements than that of a factor specializing in construction. This is not to say that the broker needs to get into the minutia of every transaction, but they should have the ability to prepare the prospect for items which will be requested prior to the evaluation process.
Secondly, a good factoring broker should have a reasonable understanding of the prospect’s business model and their motivation for additional cash flow.
Much of this can be accomplished by asking the prospect a few simple questions. In most cases, many of the broker’s opening questions can be found right on the application. Some examples of opening questions may be:
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How long have you been in business?
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What customers are you looking to factor?
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Why do you need factoring now?
It may seem redundant to ask questions that are already on the application but you will be surprised by how much additional information you can gather by engaging the prospect and building a rapport with them. In most cases, I can learn more about a person’s business within five minutes of a phone call than I could from an application and a credit report.
Why is it important for factoring brokers to prescreen prospects?
Think about it.
Every application requires some type of effort even if we do not run credit reports or UCC searches.
This equates to time and expense.
Every factor wants to fund new deals this is why we got into the business in the first place. However, we want to fund good deals not bad ones. That may sound overly simplistic but we are in this business to make money not chase money.
Finally, try to build a good rapport with your factor. The more you learn about their likes and dislikes you will eventually get into a groove and eventually fund more deals.
Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California.
For more information, he can be reached at don.dambrosio@oxygenfunding.com or you can visit his company’s website at www.oxygenfunding.com
some factors are what I call ‘specialty factors’. That would be medical, construction, maybe trucking since its so competitive. But my point is here is that there isnt a lot of room to guess since so few are willing to look at a medical or construction, given their nuances.
for what I call ‘non specific’ factoring its tough to know which factor will offer the best deal to my prospect. Or maybe the standard thinking should prevail that the prospect will just be glad to get funded and not quibble over the fees.
I’m beginning to wonder how anyone is making money at this. All the people in the business tell me how great and lucrative it is but I’ve tried five different factors, sent quite a few deals to each one and haven’t got the first one funded yet. It seems to me like they are trying to find reasons to decline instead of approve. I wish I knew a company that would work hard to approve instead of decline.
Gale. feel free to contact us and we can tell you where the deals should go. We’re experts at finding the right source for funding. 615-565-7248
Hi Gale. To answer your question, you’re right, it can be frustrating trying to close a new deal with a factoring company. If you notice in the first few sentences of this article I mention that most applications will not make it past the application for several reasons. Whether it be a bank loan, mortgage application or even getting a small line of credit, you will find closing ratios range in the around 20% for most industries. However, we have found that well educated factoring brokers who know what to look for when approaching a client have a much higher success rate. The purpose of these articles is to help you try to weed though the bad deals by giving you the factor’s point of view. I would suggest that you specifically find out why your deals are not closing. If you want a further perspective from me please feel free to contact my office at 800.790.3419.