Factoring companies have a well-earned reputation for providing cash flow solutions when banks say “No” to business financing. But there are times when even they turn down a request for factoring help.
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!