How to qualify for invoice factoring

What do factoring companies actually look at?

Factoring companies look first at who owes you money, then at whether the invoices are clean, then at whether anyone else has a claim on them. Your company’s profitability, age and credit score come after those three. That order is the opposite of a bank’s, which is why factoring works for businesses banks pass on. It also means the fix for a weak application is usually better documentation, not a better balance sheet.

Think of qualification as answering four questions for the funder. Will the customer pay? Is the invoice valid and final? Can the funder get first position on the receivables? Is the owner honest and organized enough to work with? A yes to all four usually means an approval. For the mechanics of the product itself, start with how invoice factoring works.

What kind of customers qualify?

Qualifying customers are businesses or government entities with a track record of paying their bills. Funders run commercial credit reports on each account debtor and often call their accounts payable departments. A customer that pays in 45 days every time is better collateral than one that sometimes pays in 20 and sometimes in 120.

• Strong fit: established companies, national and regional chains, hospitals and universities billed commercially, general contractors with clean payment histories, and federal, state or local agencies.
• Workable with care: smaller private companies, newer customers, and customers in industries with long payment cycles.
• Usually not eligible: consumers, related-party customers you own or control, and customers already in bankruptcy or collections.

What makes an invoice eligible?

An eligible invoice is one where the work is finished, the customer has accepted it, and nothing stands between the invoice and payment except time. Funders call anything else ineligible and won’t advance against it.

Common causes of ineligibility include invoices billed before delivery, progress billings without approved pay applications, contra accounts where you also owe the customer money, invoices more than about 90 days past the invoice date, and amounts subject to retainage. Dilution, the share of invoices reduced by credits, returns or short-pays, is tracked closely. Low dilution earns better terms.

Proof of delivery is your best friend. Signed bills of lading, approved timesheets, accepted pay applications or customer sign-off emails turn an ordinary invoice into collateral a funder trusts.

How do existing liens and loans affect qualification?

Existing liens affect qualification because the factor needs first position on the receivables it buys. Funders search UCC filings and tax lien records on every file. If a bank, equipment lender or merchant cash advance provider already holds a blanket lien on all assets, that lender must release the receivables or sign an intercreditor agreement.

This is solvable more often than owners expect. SBA lenders frequently subordinate on receivables, existing factors can be bought out, and many MCA balances can be paid from the first funding. Tax liens take more work. Read UCC liens and intercreditor agreements, factoring with an SBA loan and our page on funding with a tax lien for the specifics.

What are the minimums and size requirements?

Most factors want enough volume to justify setting up the account. FactorRoute routes facilities from $50K up, with direct factoring facilities from $50K to $3MM and larger AR placements from $3MM to $25MM. Small-ticket deals between $50K and $500K use lighter underwriting and can fund in about a week when the file is clean.

There is no universal minimum revenue or time in business. A startup with one strong customer can qualify, as can a 30-year-old company coming off a loss. See factoring for young companies. Individual invoices under a few hundred dollars are often impractical to factor because the per-invoice handling outweighs the value.

What disqualifies a business from factoring?

Most disqualifiers come down to either the wrong kind of receivable or a trust problem. Funders can structure around weak credit, losses and concentration. They can’t structure around invoices that might not be real.

• Consumer receivables or billing individuals rather than businesses.
• Fraud history, prior losses to a factor, or misrepresented invoices.
• Liens no one will release, subordinate or pay off.
• Active IRS or state levies on customers.
• Very high dilution or chronic disputes.
• Industries a given funder excludes. We do not route freight or owner-operator trucking factoring, and medical receivables billed to third-party payors are case by case.

What documents do I need to apply?

The checklist below covers what nearly every funder requests. Having it ready on day one is the single biggest lever on speed. Missing items don’t usually cause a decline; they cause delays that cost you weeks.

How does the funder verify my file during underwriting?

Underwriting is mostly verification. Once you accept a term sheet, the funder checks that what you submitted matches the outside world. Expect a UCC search in your state of organization, federal and state tax lien searches, a litigation and judgment search, commercial credit reports on your main customers, and a background check on owners.

Many funders also do a field exam or a video walkthrough, reconciling your AR aging against invoices, bank deposits and the general ledger. They will contact several customers to confirm open invoices and payment terms. None of this is meant to catch you out. It is how the funder confirms the collateral it is buying actually exists.

Expect the funder to ask follow-up questions after each of these checks. Answer them in writing and in one batch when you can, since scattered replies over several days are a common reason a one-week process stretches to three.

The fastest files are the ones where the numbers tie out the first time. If your aging shows $500K and your balance sheet shows $430K, explain the difference before the underwriter asks.

How can I improve my chances of approval?

You improve your odds by making the funder’s job easy and by fixing small problems before they become diligence findings. Most of these take days, not months.

• Clean up the aging. Write off or reserve invoices that will never be paid, and resolve old credits so the report reflects reality.
• Tighten proof of delivery. Start collecting signed delivery receipts or approved timesheets on every invoice now.
• Map your liens. List every lender, lease and advance, with contact names, so release requests can go out on day one.
• Catch up on taxes. File any missing returns and set up a payment plan before you apply.
• Lead with your best customers. If some accounts are weaker, propose starting with the strongest and adding others later.
• Be candid. A short note on anything unusual, such as a lawsuit, a loss year or a lost customer, saves days of back and forth.

Step by step

1. Run your AR agingExport receivables by customer and by age as of this week.
2. Grade your customersMark which accounts are established businesses or agencies and how fast each pays.
3. Search your own liensPull UCC and tax lien searches on your business so you know what the funder will see.
4. Gather the checklistCollect the documents in the checklist table, including proof of delivery for recent invoices.
5. Check fit in 60 secondsUse the qualification tool to confirm size, customer type and industry fit.
6. Compare proposalsReview advance rates, fees, reserves and term length before choosing a funder.