Factoring 101 Challenge #6: Qualifying a New Client

Qualifying a prospective client for submission to a factor is generally easy.  As long as your prospect operates B2B and is invoicing, that is prospect that should be submitted.  Remember, unlike banks and lenders that require that a business have some credit history, factors typically do not.  That is because the factors are much more concerned about the creditworthiness of the customer, the payor on the invoice, rather than you client.

Additionally, although your referral must have free and clear invoices for purchasing and with no other senior lenders present, any other issues determining the suitability for factoring is handled with the factor’s due diligence process.

How to Qualify a Now Prospect for Factoring

So…you’ve generated a sales qualified lead for business finance from a mailing or referral.  Now what?  Fortunately, factoring is one of the most easily accessed methods of business finance worldwide.  And, if you, as the broker, simply follow a few easy qualifying steps, you can submit good deals, refer them to the lender, and start earning commissions…or, if not a good fit, you will avoid working on and wasting your time on deals that are not capable of being financed.  Learn the underwriting rules of factoring.

Step One:  Get the Prospect to Complete a Company Profile

In most cases, getting a completed IACFB Company Profile from your prospect will tell you everything you need to know about that lead and it’s ability to qualify for factoring.  And… once in hand, here are a few things to look for immediately.  Look for….

  • DOLLAR VOLUME OF RECEIVABLES NOW OPEN:  The size of the balance of accounts open tells you the size of the client.  Typically, any thing aver $25,000 is acceptable and even less if the factor sees the business will grow with the new financing in place.  If a business shows no accounts receivable outstanding, then it is not a prospect for factoring.
  • DEAL BREAKERS:  See if the client evidences that it has any apparent “deal breakers” such as existing loans already outstanding or tax lien issues.  If either is in place, it may prohibit a factoring arrangement.  You should, however, send the deal to your factor anyway. Let the factor’s business development staff verify that those two deal killers are active issues.

Step Two:  Get an A/R Aging Report

Always try to get a current accounts receivable aging report from the prospect.  This report, generated from the prospect’s account software, will document the current receivables outstanding, the name of the account debtor’s (customer’s), and how long the invoices have been outstanding.  It is not uncommon for some business owners to seek factoring in the hope that the factor will buy invoices that are way overdue and in jeopardy of non-payment. Factors finance businesses by purchasing receivables.  THEY ARE NOT BAD DEBT COLLECTORS.  If you see an aging report with a large percentage of past due invoices, there could be a serious problem and it’s unlikely the deal will be accepted.

Contracting the New Client

Unlike banks and more traditional lenders that may require two to three weeks to make a loan determination, factors will contract a client within just a matter of two or three days and be able to make the first advance on invoice purchases.  Usually after receiving a Company Profile and if acceptable after some basic underwriting, the factor will quickly issue a Terms and Conditions letter outlining the proposed factoring transaction.  If the terms are accepted by the client, it will be quickly followed with a factoring agreement called a Master Purchase and Sales Agreement.

Avoid These Common Submission Mistakes from New Brokers

As you should now know, deal submission in factoring is deceptively simple but there are several very common mistakes made by “newbie” brokers and they almost always involve identifying the type of financing needed.  As a new freelancer, you will understandably be excited when you get your first completed company profiles, but don’t let your excitement allow you to make any of the following mistakes such as…

  • SIMULTANEOUS SUBMISSION: As an expert consultant, you always want to refer your clients to the right factor and get them a “good deal”.  Never, however, fax or email simultaneous submissions to different factors at the same time.  Simultaneous submissions are very much frowned upon in the industry and if discovered, will cause most factors to simply walk away from the deal.  Brokers should choose a factor carefully and then let that factor do its initial underwriting to either accept or decline the deal.  The industry is very competitive from a fee standpoint and if you have chosen a factor in the right niche area and your client qualifies, there will be no need for any subsequent submissions.
  • KNOW THE DIFFERENCE BETWEEN FACTORING, PURCHASE ORDER FINANCE, AND CONTRACT FINANCE:   Almost all NEW brokers make the mobilization funding mistake, usually because they think there might be something they’re missing in the deal and it can somehow be done.  So, they run it by a factor just to see.
    • Mobilization Funding is when capital needed to gear up for an awarded contract.  No actual work has been done yet, however, and there are no real invoices yet to be purchased.  These deals will always be declined until the funding is based on a valid invoice where work has been done.  In those situations, query the prospect to find out if he or she has other invoices where the work has been performed but payment has not been received.  Perhaps these can be substituted for factoring and funds used to provide the needed funding.
    • Purchase Order Funding is often required when a large order from a customer for goods that are not in inventory and must be manufactured.  This very commonly occurs when a manufactures in the Pacific Rim and the offshore factory requires a significant down payment to get started and full payment before the goods can be shipped.  This is not factoring because there is no invoice…YET!!! But, once received by the customer, there will be an invoice which will be factored.  To accommodate this style transaction, factors work hand-in-hand with specialized purchase order funding specialists who will post letters of credit to pay the foreign factory.  Brokers earn purchase order finance commissions which are typically similar to factoring commissions.  Purchase Order Funding offers consultants and brokers to earn “double commissions” since once delivered to the buyer, it almost always results in factoring of the invoice which “takes out” the purchase order finance company.

So submitting a deal to a factor is very simple.  If the business operates B2B and has invoices, it is a good prospect for factoring.  Send it to your factor’s underwriting staff.  Always let them approve or decline the deal.  Often, if the deal is initially declined, for example a client having tax issues, the factor’s staff can work an arrangement with the IRS which will make the deal work.

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