Small business owners in all kinds of industries can benefit from invoice factoring. However, if you've been thinking about using this funding source, you might be concerned that previous financial troubles could interfere with your approval. One of the great things about invoice factoring is that you're often able to get approved even if you have had financial issues in the past. Whether your application is accepted or not usually depends on the type of financial problem you've had and what your prospects are for the future.
How Invoice Factoring Works
Invoice factoring allows you to sell off your customer invoices for a cash advance. When you factor your invoices, the factoring company pays you most of their face value and then sends you the remainder after your customer pays the invoice in full. Entrepreneurs often turn to factoring when they need immediate cash flow and can't afford to wait the typical 30 to 90-day payment window.
Potential Financial History Issues
Since many banks require a spotless credit history, small business owners often run into problems when they try to qualify for a traditional bank loan. Invoice factoring, though, doesn't require this type of credit check. Instead, the factoring companies tend to examine the payment history of your customers, since the account will be cleared after they pay the invoices off.
As a result, most of the common financial problems that would disqualify you from a bank loan don't have any effect on your ability to factor invoices. These issues include low profit margin, medical debt, collection action, and even personal bankruptcy. Depending on which factoring company you want to work with, you may be able to get your request approved even if you've dealt with one of these issues previously.
Invoice Factoring and Income Tax Liens
The one area where your financial past may disqualify you from invoice factoring is your federal income taxes. If you owe substantial back taxes to the IRS and the agency has placed a tax lien on your assets, most invoice factoring companies may not be willing to take a risk on working with you. A tax lien gives the IRS the power to seize the profits from your assets if you ever decide to sell them. In this scenario, a factoring company would be unable to pursue collection action toward you if your customers defaulted on their invoices.
Can your financial past disqualify you from invoice factoring? In most cases, the answer is no. But, if you're dealing with a federal tax lien, you will probably have to clear up your account with the IRS before you apply for invoice factoring.