Qualifying
for a Factoring Service
How
do I avoid spending a lot of time on this only to find out that
nobody will help me?
Factoring
services specialize in helping businesses that need more funding
than they can get from traditional sources.
However,
that doesn't mean you are guaranteed to get approved. Rather than
give you a fuzzy answer to a difficult question, we'll try to help
by giving you the straight scoop on how factoring services make
their decisions, and how you can best evaluate your position. Our
goal is to save you time.
This
section is basically a questionnaire for you, with points associated
with it. You can use your point count as a very very rough guideline
that helps to explain how likely you are to get approved by a factoring
service.
First,
there is one thing we need to clarify:
Do
you need Purchase Order Funding?
If
you want to receive funding for an invoice prior to issuing it to
your customer (perhaps because you need the money to pay your vendors
first) then you can stop right here.
This
is a process called Purchase Order Funding, or P.O. funding, and
our experience is that it is a very expensive service that rarely
yields a satisfying outcome after an application is submitted. There
are exceptions, but our advice to you would be this: If there
is any way at all you can wait until after you have issued your
invoice to receive funds, please wait.
The
rest of this section assumes that you do not need PO funding. If
you do, we don't really have a good recommendation for you, since
we have not come across a service we really like. Ever. If you use
one today that you are very satisfied with, please
email us.
The
point system
What
we are about to suggest is not perfect, but it is the best way we
know to give you some guidance about likelihood of approval by a
factoring service. Let's assign your business points for different
characteristics. Based on those points, we hope we can give you
a rough idea of how likely you are to be approved by a factoring
service.
Are
you in the construction industry? (if YES, subtract 50 points)
Construction
is risky for factoring services for a host of reasons. A subcontractor
may not be paid unless their general contractor is paid. There are
liens that can supersede the lien imposed by the factoring service.
However,
if you sell primarily to end users rather than selling to general
contractors, you can add back 35 points.
Do
you sell goods that are perishable? (If YES, subtract 80 points)
The
problem is simple. If the goods can go bad between the time that
a factoring service confirms your invoice and the time your customer
is expected to pay you, your customer might not be inclined to pay
for them. It is not fair, but it is a fact of life.
About
how much of your revenues do you do with your largest customer?
(If more than 50%, subtract 50 points; if less than 15%, add
75 points.)
To
a factoring service, customer concentration is risky.
Thinking
about the largest four customers that you want to factor, how strong
is their credit? (If very strong, add 50 points; if pretty weak,
subtract 75 points).
How
does a factoring service determine how strong or weak your customers'
credit is? They'll look at public and private databases. But you
can get a rough idea based on what you know about your customers.
If they are companies with over a couple of hundred employees and
have over $25 million in revenues and have been in business for
more than 10 to 15 years, chances are their credit is very strong
(this isn't guaranteed, naturally.)
If
they are relatively small companies that are young and tend to have
fewer than 20 employees, chances are that they would be considered
"weak" credit by a factoring service, even if you know
they pay you on time.
How
strong is the personal credit of your majority owner(s)?
(If very strong, add 30 points; if very weak, subtract 50 - 100
points)
Every
factoring service you apply to will run a credit check on at least
one of the owners before approving your company.
How
do you know how strong your personal credit is? Chances are that
you already have a pretty good gut feel sense for this. But, just
in case you don't, you can go to www.myfico.com and pay a few dollars
to find out your exact FICO score. Most factoring companies would
consider a score over 700 very strong and a score under 600 very
weak.
By
the way, one question we often get asked is "Should I apply
to many factoring companies that will all check my credit report
and lower my score?" This is a natural fear. That's part
of the reason we suggest first sending out the questionnaire in
our section on choosing an invoice factoring company. However, in
practice, a few checks of your credit report will not be the determining
factor in approval or denial of credit, especially since factoring
services tend to check credit with only one credit agency, whereas
credit card companies tend to check credit with all three credit
agencies simultaneously.
How
much dollar volume do you want to factor?
(If less than $10,000 per month, subtract 90 points; if more
than $50,000 per month, add 50 points.)
A
factoring service will look for a way to approve you if you factor
more than $50,000 per month. They will look for a way to turn you
down if you do less than $10,000 per month.
OK.
I'm done. Now how do I interpret my score?
Please
take this little scoring system with a healthy grain of salt. That
said, if you get a score of zero or more, chances are reasonably
good you'll get approved. If you get a score lower than zero, then
it might be difficult. Not impossible, but difficult nevertheless.
What
if I'm a brand new business?
Even
a one year track record is meaningful to a factoring service. But,
let's suppose you don't even have that.
If
you have been in your industry for a number of years working for
a larger company, and you have good references, and you have good
personal credit and some personal assets, you should still apply.
But, please recognize that your chances are not that great.
OK.
I'm willing to invest a little time in applying for a factoring
service
Great.
We encourage it. Our recommended approach is outlined in the 3rd
link below:
How
does invoice factoring work? What is the process, and what
will my customers experience?
How
expensive is account receivable factoring?, and what other
terms should I pay close attention to?
What
is the best way to select a factoring company? How do I
avoid the time consuming process of winnowing through all the factoring
companies out there, yet still get the best terms for my business?
"If
you get lost while navigating our site, click on Factoring
Companies, Invoice
Factoring, Factoring
Service to
go directly to the home page. We use such phrases interchangeably."
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