Top 10 Accounts Receivable Factoring Questions

What are the 10 most common questions presented by a business considering accounts receivable factoring?  More importantly, how should you address them?

If you have to convince a prospect that he/she needs invoice factoring, or your prospect is picking apart everything you are presenting, you are wasting your time. It’s as simple as “the business either needs accelerated cash flow or it doesn’t.”

Therefore a true prospect will not be adversarial in dealing with you, but there will be genuine questions and concerns about the process. That is fair and highly predictable.

Accordingly you must prepare to educate your prospect and anticipate the very predictable questions.

10 Questions Likely to Come Up In Your Next Factoring Presentation

1- What will my customers say when they find out that I’m factoring after you notify them of the assigned invoices?

I can understand your concern; however your customer has other vendors that also offer terms that are probably factoring as well. Additionally factoring is a sign of strength as many Fortune 500 companies use factoring in their funding strategy.

2- Why do you need all of my accounts receivable as collateral and not just the ones you purchase?

Accounts receivable is a singular noun. The collateral is that one item, consisting of many accounts. Securing the factoring transaction by the purchased invoices alone is like securing a mortgage with the living room and kitchen only, and not the entire house.

3- Will I lose control of my billing and posting?

Not at all, we purchase your invoices once you have generated them, and we post upon receiving payment. Once we post, we send you the posting report. You also have visual access to your factoring account so you can see all open invoices.

4- You are charging 3% discount on thirty days, isn’t that’s a 36% interest rate?

I understand your math but this is not a loan therefore you cannot calculate your cost that way. If you sell us $100K in invoices per month and you pay 3% per month, your cost is 3% of the total invoices sold. Over a year you will have sold us $1.2MM in invoices and we will have earned $36K in fees (3%). If you give your customer a 2% discount for paying in 10 days, are you paying 72% interest? (2% on 10 days is 6% per month over 12 months = 72%) Can you see the error in your logic?

5- What if my customer does not pay you?

There are two reasons for non-payment by the customer. First the customer goes bankrupt or insolvent, second, any other reason. What I mean by that is, most factors will absorb the risk of the debtor (customer) going bankrupt. All other reasons have to do with product or service provided for which we as the factor cannot be responsible. In such a case, we can either take an exchange invoice to collateralize the advance or we can charge the non-paid invoice back to you through a payment from your reserves.

6- Why do you only advance 80% of the invoice’s value?

There are many reasons why a customer pays less than the invoiced amount; product or service insufficiencies, cooperative marketing expenses, charge backs from previous invoices and many other reasons too lengthy to elaborate upon. During the underwriting process the factor will evaluate past history of such “dilution” events and determine a safe advance rate based on the empirical evidence in the applicant’s historical payment profile. Another consideration on advances is the credit profile of the debtor itself. Sometimes advance rates are set using the credit profile of the debtor. Advances of 70% and above are common in the factoring industry. Always remember, however, that you are going to get the balance less the factoring fee once the invoice pays.

7- What if I do not factor a particular invoice, what happens to the payment that comes in?

This happens quite often and when it does, the funds get passed through to you with no factoring charge. The factor did not buy the invoice, so it cannot earn fees on the invoice.

8- Can I factor my invoices more than once per week?

We will set up a schedule for you that best works for you cash flow needs. As long as we have a verifiable invoice representing goods or services already provided, we can fund. The schedule is designed for you.

9- My credit history is not very good, will that disqualify me from factoring?

We generally see personal credit profiles from our applicants that are certainly not the strongest. However unless there are significant legal / moral issues in your profile, we will be able to move forward.

10- How long does to take to open my account?

If you are attentive to our request for documents, we can have your account open in about two weeks. In some cases a bit sooner some may take a bit longer.

How To Effectively Answer Any AR Factoring Question

Always remember that the best way to approach an objection or a question it to first confirm its validity:

I understand your concern as many other clients have had the same question.

Next re-state it at the start of your answer:

So to answer your question as to why we will notify your debtors…

Then finalize the answer:

It is quite common for finance companies that use accounts receivable as collateral to require that the debtors pay the lender / factor so they can control that asset.

Now reassure the prospect that all will be well going forward:

You will find that your debtors are probably dealing with other vendors that are also factoring thus your customers are probably dealing with factors and know the routine.

My suggestion is that the more you deal with objections (and these are certainly the most predictable ones that arise) the more successful you will be in closing transactions. You will gain huge credibility and you will then become a source for financial solutions in the future.

About The Author:

Xynergy Healthcare Capital LLC is an industry specific finance company located in south Florida, with nationwide clients and referral sources.

For more information contact Fred Leder at (954) 519 2376 or by email at fleder@xynergycapital.com. You can also visit the company website at xynergycapital.com.

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