Last Updated: February 08, 2023
How to Qualify for Invoice Factoring - Invoice Factoring Qualifications
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Once you determine that invoice factoring is right for your business, you need to create a shortlist of factoring companies and then complete an application. It helps to understand what factoring services are looking for, though, before you expend a great deal of energy researching services and completing applications.
What do Factoring Companies Look For?
Before approving an application, factoring companies consider the following:
Credit: As a welcome twist, factoring companies aren't concerned with your credit as much as they are with your customers'. After all, they rely on your clients to pay their bills, so the factor's main concern is your clients' payment history, particularly whether they pay their bills on time and in full.
Clean company background: The factor isn't concerned with your company's credit rating, but it does expect you to be clear of tax complications and bookkeeping or financial issues.
Invoices have been issued: Factors will not accept "future" invoices, such as those that are planned for work that has yet to occur, even if those invoices are part of a contract. The invoices must be current and have a maximum payment term of 90 days. Factors do not accept longer payment periods or extensions.
The company owner's background: The factoring company typically checks public records on the company's owner or owners, as well as officers and other company directors. This background check may also include personal matters, such as criminal records and bankruptcies, assuming those are part of the public record.
What Are the Qualifications for Invoice Factoring?
In addition to your application, your business must meet certain criteria to qualify for invoice factoring.
- Own a business: This belongs under the "of course" column, but it does need to be mentioned. To take it further, corporations and LLCs are the preferred business type. However, sole proprietorships and partnerships may also find factoring companies willing to take on their invoices.
- Ample profit margins: Your company needs decent profit margins, at least in the 10 to 15 percent range (the exact requirement varies by factoring company and the size of your business, with smaller companies typically needing a larger profit margin).
- Must have either government or commercial clients: You must invoice either government agencies or other businesses; retail businesses do not qualify for invoice factoring.
- No open bankruptcy: You may be able to find a factoring company if you're in an open bankruptcy, but the process is so expensive and complicated, you'd be better off waiting until your bankruptcy closes.
- No liens or encumbrances against your invoices: You cannot finance invoices that have already been used as collateral somewhere else. If a finance company has encumbered your invoice, it must agree to subordinate its claim before you may factor it. Legal judgments and tax liens may also encumber your accounts receivable.
- Tax issues must include a payment plan: If you have a tax lien or other tax issue, you must have a payment plan AND the taxing authority (typically the IRS) must be willing to subordinate its claim against your receivables. Your other option is simply paying the monies owed to remove the lien. These are only the basic requirements you're most likely to find with any invoice factoring company. Each factoring service may have its own specific requirements in order to qualify.
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