I recently wrote an article on factoringinvestor.com entitled, “How to Qualify Factoring Prospects

by Asking Three Simple Questions”, and I wanted to elaborate on that article in this

video blog post. I wanted you to picture this scenario: if you’re a factoring broker – say

you had a business owner approach you. They’re in need of cash flow assistance; they’ve

been in business for a year, they have three large customers that routinely pay in thirty

days. You’re really excited about the prospects of finding them a factor; you have one in

mind. You call the factoring company. They say yes; they’re interested; they’ll be

in touch after they make contact – and the next day you get a phone call from that factoring

company saying they’re no longer interested. I’d like to go over three simple questions

that you can ask your factoring prospects to make sure that this type of scenario never

happens again. The first question to ask when pre-qualifying a factoring prospect is, “Are

you receivables free and clear to be purchased?” the answer really affects whether a factoring

company is going to want to pursue this deal or not, because a factoring company uses accounts

receivable as collateral to secure their fundings. Basically, in the event that a factor doesn’t

get paid, in the long run something goes bad, the factoring company can lay claim to the

receivables and still collect out – even if the business itself closes down. What the

factoring company does to ensure this is filing a UCC-1 on the business owner’s receivables.

Basically, the way UCC-1 is: it stands for the “Uniform Commercial Code”, and it

alerts other funding companies that if they intend to use collateral for a business owner

to secure a loan, that there is another funding company that is already entitled to that collateral

in the event that the company closes its doors. If the receivables are not free and clear

to be purchased, then a factoring company is automatically going to be a little less

interested in the deal. If a little bit of a balance is left on a loan, and the business

owner is able to pay that off, it may be that the company can use its initial funding with

the factoring company to pay down that loan. Then, a factoring agency is going to be a

little more interested in the deal. If there are hundreds of thousands of dollars owed

on a loan, or if there are hundreds of thousands of dollars outstanding with another factoring

company, then the current factor is going to be a little less interested in moving forward

with the deal. The second question to ask all of your factoring prospects is, “Are

you behind on your taxes?” and if the answer to that question is “Yes”, then the next

follow-up question is “How much do you owe?”. Just like when another funder files a UCC-1

on the receivables of the business owner, the IRS is the only entity who can trump a

factoring company’s UCC-1. Basically what happens is, if you’re behind on your taxes,

the IRS tries to get your attention by filing an ‘Intent to Levy’ on that company’s

assets. Now, this includes both physical assets like equipment, computers, fax machines, telephones,

office supplies, things like that. And, it also includes assets – liquid assets: bank

accounts, receivables, things like that. So, if a business owner owes a lot in taxes and

there is not a payment plan in place, a factoring company is going to be a lot less interested

in pursuing that deal. Now, in some cases, factoring companies can work with business

owners who owe taxes, provided that they can show that there is a re-payment plan in place

and that the re-payments are being made in a timely and orderly fashion. The third and

final question you want to ask your factoring prospects is “Who do you bill? Who are your

customers?” Basically, in order for the factoring model to succeed, you want to have

a smaller business that is less established; maybe a start-up company, only been in business

a year or two, and they’re selling to really large, established, creditworthy customers

– because basically, then, the small business can leverage off their customer’s credit.

The factor is going to look at the debtors, the customers of the client’s, and analyze

their ability to repay the invoices that the factor is buying. So as long as a smaller

business is selling to a large entity, the factoring equation works out fine. Where it

breaks down is if a smaller business is selling to other small companies that aren’t so

creditworthy, or that haven’t been in business for a long time… and routinely, I see deals

turned down especially when the business owners are selling to private individuals (because

it’s really hard for a factoring company to establish credit and get comfort with a

private consumer’s credit, and/or when their clients are billing debtors that take a really

long time to pay. Now, what is a really long time? It depends on the industry’s standards:

for example, in a medical staffing industry, it’s typical to see payment terms of thirty

to sixty days, whereas in another industry, that may be too long for a factoring company

to consider buying an invoice. So, basically I want you factoring brokers to keep in mind

that if you want to avoid the scenario I started talking about in the beginning of this video

blog, to ask these three questions: “Are your receivables free and clear to be purchased?”;

“Do you owe any taxes and if so, how much?”; and ‘Who are you billing?” – and that

way, you’ll be better prepared to present a good factoring candidate to a factoring

firm in the future. For more information, please visit PRN Funding’s website at www.prnfunding.com.