factoring receivables

Factoring Receivables? 3 Tips for Approval

Factoring Receivables? 3 Things to Check

factoring receivablesSo you’ve decided you want to start factoring receivables. That’s great. Invoice factoring provides a number of pros for your business. Factoring can support fast growth, provide a cash flow infusion during a rough patch and free up resources (time and money) for your business. It can even improve your bottom line.

But when you have selected a factoring company you’d like to work with take some time and consider these three issues that are sure to come up during the application process.

Be prepared for these three questions from invoice factoring companies:

  1. Are your Receivables Free and Clear?
  2. Do you Owe Back Taxes?
  3. What are your Profit Margins?

Factoring Receivables: Are They Free and Clear?

When factoring receivables, you will undoubtedly be asked about your receivables-specifically if they are free and clear. Factoring companies want to make sure they are able to collect from the account debtors invoices. Factors will make sure the business isn’t already using another factoring company and no one else has any legal claim on these same assets that the factor is using as collateral. A UCC 1 (Uniform Code) will be filed that will determine if there are any liens on these receivables.

Inform the Factoring Company if you Owe Back Taxes

The next thing a factoring company will ask is if you owe the IRS (Internal Revenue Service) any back taxes. Factors need to know this because the IRS’s claim on any business asset is senior to any other claims. In other words, factoring companies don’t want to get into a battle with the IRS over a claim on someone’s assets. The factor will lose and they know it.

While owing back taxes is a setback for a prospective business customer, it doesn’t have to be a deal breaker. If the business client can show the factor that there is a payment schedule in place with the IRS there may still be able to start factoring receivables. But be up front with the prospective factoring company about any back taxes owed.

What are your Profit Margins?

Many businesses that inquire about factoring receivables don’t maintain strict financial records. That’s fine, but a factoring company will ask about the profit margins? Why? Think about it from the factors perspective, they want to be factoring receivables for a business that has the ability to grow. If the company is relatively new and already has low profit margins, it’s not a great indicator of a viable business. A factoring company wants to see profit margins of at least 10%, hopefully 15%. Accounts receivable factoring is a viable small business funding option your business and keep your operations on the right growth trajectory.

Hopefully, these tips were helpful in getting approved by a factoring company. The key is to find the best factoring company for your business. That could be based on location, industry or simple your comfort level with them and their cost structure. We provide reviews on several factoring companies and aim to help small businesses decide whether invoice financing is right for their business.

Often times, businesses turn to factoring when the banks turn them down due to a lack of operating history, financial statements or profitability. Don’t worry, this is a common issue with fast growing companies. Factoring frees up resources that your company can use to further growth, not act like a debt collector. Plus, the immediate funding allows businesses to capitalize on supplier discounts or strategic opportunities.

bond bubble

The Bond Bubble and Invoice Factoring

The Bond Bubble and Invoice Factoring

bond bubbleRegardless of how you define deflation, its prospect is a major threat to small business funding. It’s defined in different ways depending on what you read. The most common definition is falling prices. With this in mind, falling prices more the result of what we view as the deflation. The definition we like is “a contraction in the supply of money and credit in the economy”. With easy credit, the bond bubble has expanded to create trillions in global debt.

Perhaps you are wondering what this has to do with invoice factoring? Here’s how.

When the supply of credit shrinks, its called a credit crunch. As you remember, we experienced that during the financial crisis. The result- banks stop lending. The only lending that will remain is secured, asset based lending.

The Bond Bubble Threatens Small Business Funding

Small businesses should fare the worst if the deflation is as scary as some predict. This is because During the financial crisis, we saw bank lending to small businesses dry up in many states. In fact, Fox News revealed that the U.S. lost 200,000 due to a lack of small businesses funding as measured by the Census Bureau.1 Up to 82% of small businesses failures stemmed from a lack of funding.

So a viable option for many businesses is invoice or accounts receivable factoring. In case you’re wondering what is factoring, here’s a quick refresher

‘The prospect of deflation is a major threat to small business funding.’

Invoice Factoring is not a Loan

Since your business sells unpaid invoice to a factoring company, you sidestep the need for lending. Remember, invoice factoring improves net working capital while incurring no new debt, while invoice financing is subject to the availability of credit.

Our advice would be to establish a business relationship with an invoice factoring company sooner rather than later. Look for a company that will let you factor a single invoice, known as spot factoring. This way, even if you hadn’t planned on factoring receivables, you will officially be a customer of theirs. This is important because when the bond bubble pops and deflation begins in earnest, every small business in America could be looking for a factoring company.

‘When deflation kicks in and credit does dry up, every small business in America may be looking for a factoring company’

Here’s another tip when selecting the best invoice factoring companies for your situation, make sure they offer non-recourse factoring (not all do). Factoring companies could very easily stop offering the non recourse factoring option to new customers and make all the transactions done on a full recourse basis. You could have a better chance to remain operating under a  non-recourse method (basically being ‘grandfathered’ in). Check our factoring company reviews to locate a factor in your area. Like with a business line of credit, the time to apply for small business funding is before you need to.

Some factors with deeper pockets (either backed by venture capital like Fundbox) or affiliated with a bank (such as Florida’s Amerifactors or Michigan based  Crestmark) should weather an economic downturn better than most.