Red Flags of Factoring: When to Walk (or Run) Away From a Deal

red flag Factoring deals“Time is money” is a cliché, but also a reality of the factoring industry. Unfortunately, all too often we waste time – and money – chasing prospects and shopping deals to any number of funders without identifying the fundamental issues that will doom a deal before you make the first pitch.

Before you invest in any deal you must ask: will any rational funder make this work?

Without delving into funder preferences and gray areas, there are five red flags you should look for in any factoring lead you come across:

Medical deals with very low dollar amounts

Medical factoring in particular is very time and effort intensive. While some medical factoring companies will at least take a look at very small deals, the majority will determine that the payout is not worth the legwork.

“Guaranteed” sales deals

Steer clear of leads that have a product that they sell to their customers with a guarantee – because until the product is really gone, they haven’t really sold it. What these companies actually do is place their product in a customer’s store with a guarantee that if they do not sell in a given time frame the prospect will purchase them back. Factoring companies are typically unwilling to assume this kind of risk.

Spotty client background

Factoring is based on trust and verification, which is part of the reason we run background checks on leads in the first place. Poor credit is negotiable; what is not, however, is any history of white collar crimes including theft and financial fraud. You will have a difficult (if not impossible) time finding a factor that will fund a company associated with that kind of background.

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Debtors with bad credit

While funding based on debtor credit is a great selling point, it is also the second-fastest way to kill a deal. You can’t shop or fix a deal in which your prospect is selling to debtors with horrible or non-existent payment histories, bankruptcies, or other financial issues dragging down their credit score. The best you can do is to advise your prospect to work with better customers.

Prospect is selling to customers

This is an immediate deal-killer for invoice factoring. Factoring is a business-to-business operation, and funders will not touch a deal where the invoices are payable by individuals.

However, this particular red flag has a silver lining: instead of factoring, the prospect may be able to obtain financing through options such as an unsecured business loan. These loans are easier to obtain than a traditional loan and do not require the prospect to sell to businesses.

Above all, trust your instincts when working a questionable lead. If the deal doesn’t feel right to you, it likely won’t appeal to any funder you approach. Rather than exhausting your time and energy on dicey factoring deals, put that effort back into growing your business. Work to improve your marketing campaigns, contact and re-establish relationships with worthwhile prospects from the past, and concentrate on chasing the deals that truly matter.

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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