Got a Great Prospect? Watch Out for These Deal Breakers

So you’ve got a great factoring deal in hand and you’re already calculating the commissions you’ll be receiving every month…right?  The good news is, most clients for factoring will be accepted so long as they operate B2B and invoice their customers under normal terms.  There are, however, “deal busters” that can make that new client not acceptable for factoring.  Some “deal busters” will show up on your Company Profile Application.  Others will not.  These are the “deal busters” that can turn a prospect into a problem as soon at it surfaces.

  • Prior Lender on Accounts:  All factors require a senior lien on accounts.  This means they must be able to file a UCC-1 noticing others that priority is now theirs.  If a search of the UCC database evidences a prior lien filed by some other lender that is active and collateralizes that loan with accounts, factoring is no longer possible.
  • Tax Liens:  Tax liens have the ability to levy.  This means if the taxing entity feels they are in danger  of not going get paid, they can re-direct invoice payments to themselves and step in front of a factor on that payment.  In factor terminology, this is being “primed”.  Factors will not take that risk.  Before taking on your new client, the factors will need to deal with this problem.
  • Pre-billing:  This will not show up on your Company Profile but it will show up on the copies of invoices and in verification.  Pre-billing occurs when a client invoices early to “get in the payment queue” or, in other word, they will invoice for work on the first of every month for work that will be performed later through to the month.  Work must be already performed to be valid on an invoice.  You will see pre-billing on some services prospects such as commercial cleaning or guard / security services.
  • Consignment Invoices:  Goods sent to a customer on consignment are goods which the customer will use its best efforts to sell but will not actually purchase.  In the event the goods do not sell, they are then returned to the manufacturer / distributor and payment is only made upon the goods actually sold.  You will see consignment invoices from manufacturers and distributors using television sales organizations for promotions.  Goods sold are sold.  Goods not sold are returned to the manufacturer for credit.
  • Client Creditworthiness: While factoring is often easier to qualify for compared to traditional financing, not all clients may meet the necessary credit criteria. Deal-breakers may include clients with poor credit histories or those with unstable financial positions.
  • Invoice Quality: Factoring relies on invoices as collateral, so the quality of invoices matters. Invoices that are disputed, inaccurately billed, or related to non-creditable transactions can lead to problems and potentially jeopardize commission payments.
  • Client Industry Risk: Some industries inherently carry higher risks than others. For example, industries prone to frequent chargebacks or disputes, such as certain retail sectors, may pose challenges for factoring companies. Understanding the risks associated with different industries is crucial to avoiding deal-breakers.
  • Contract Terms: The terms of the factoring agreement can significantly impact commission payments. Deal-breakers may include unfavorable terms regarding recourse provisions, advance rates, fees, and contract duration. It’s essential to carefully review and negotiate contract terms to ensure they align with your business objectives.
  • Client Diligence: Thorough due diligence on potential clients is essential to mitigate risks. Deal-breakers may arise if clients have undisclosed financial issues, legal disputes, or operational inefficiencies that could impact their ability to repay advances or fulfill their obligations under the factoring agreement.
  • Customer Relationships: Factoring involves direct interaction with your clients’ customers, so the strength of these relationships is crucial. Deal-breakers may include clients with poor customer relations, which could lead to payment delays, disputes, or other issues that affect commission payments.
  • Regulatory Compliance: Compliance with regulatory requirements is non-negotiable in the factoring industry. Deal-breakers may include clients operating in regulated industries who fail to meet compliance standards or clients engaging in fraudulent or illegal activities.
  • Market Conditions: Economic downturns or fluctuations in specific industries can impact the financial stability of clients and their ability to repay advances. It’s essential to assess market conditions and adapt your risk management strategies accordingly to avoid deal-breakers.

Factoring is, of course, all about buying invoices and providing a financing mechanism for small and mid-size businesses by accelerating the payment on outstanding accounts receivable.  To make this type of financing “work”, the factor must be reasonably certain that invoices purchased will ultimately be paid.  All invoices, however, are not created equal and in addition, factors are NOT buyers of delinquent debt or invoices with perceived payment problems.