This article provides a clear overview of the key factors factoring companies consider when evaluating potential clients. Understanding these requirements upfront can save you valuable time and effort. We aim to provide transparent information to help you determine if factoring is the right financial solution for your business. If you find this information helpful, we would appreciate the opportunity to connect you with one of our trusted factoring partners. Even if you don’t qualify for factoring immediately, addressing any identified issues can improve your eligibility in the future.
Let’s begin with a fundamental understanding of factoring: Factoring is a financial transaction where a business sells its accounts receivable to a third party, known as a factor, at a discount. To qualify, you must invoice creditworthy businesses for delivered products or rendered services, as factors typically do not finance pre-bills or accounts with existing collection problems.
Consider these crucial aspects of your business:
* **Monthly Invoice Volume:** Many factoring companies have minimum monthly invoicing requirements, often around $10,000. Disclose your monthly volume early in the conversation to avoid wasting time with unsuitable factors.
* **Number of Customers:** Factors generally prefer businesses with multiple customers, which diversifies their risk. Having a single, large, and stable customer can be an exception.
* **Existing Financing:** Determine if your current lender has a UCC-1 lien on your accounts receivable. Factoring companies require a first lien position to provide financing. A factor might be able to pay off a smaller loan to obtain this position, or your existing lender might agree to subordinate their lien.
* **Accounts Receivable Aging Report:** An accurate aging report, aged from the invoice date, is crucial for assessing your cash flow. Unhealthy aging, indicating slow payments, can hinder your eligibility and increase factoring fees. Ensure you have a cash flow problem, not a collections issue.
* **Outstanding Liabilities:** Disclose any outstanding taxes, liens, judgments, litigations, felony convictions, or bankruptcies upfront. While these issues don’t automatically disqualify you, transparency is essential.
* **Business Structure:** Some factors do not work with sole proprietorships. Inquire about this early in the process.
* **Financial Statements:** Some factors require financial statements, offering potentially more favorable rates. If you prefer not to provide financials, ask about alternative programs.
* **Personal Credit:** While customer creditworthiness is paramount, your personal credit history is also considered. Discuss any significant credit issues with the factor.
By addressing these points proactively, you can streamline the factoring process and determine if it’s the right financing solution for your company. Thank you for taking the time to learn more.