After you submit your application to a factor, you have little control over whether or not it will be approved. You might wish that you had included more information to make your petition look better.
In fact, there are several ways that you can make your request more appealing and increase the likelihood of your approval. You should consider these six important tips before submitting an application for factoring.
Have Documentation Ready
Some factors will ask for documentation like financial statements while others may not. Because you may not know ahead of time what information your factor will need, it will work to your advantage to have a variety of documents ready just in case.
These documents can include not only your financial statements, but also aging reports and personal tax returns. Having this information available if requested can make your application look more thoroughly prepared and speed up your approval.
Include an Executive Summary
Even if it is not required, an executive summary can be one of the most important aspects of your factoring application. The summary gives you a chance to present your company in the best light and explain any challenges you may be facing. Details that should go into your executive summary include:
- Company History
- Background information about the owner
- Current market opportunity
- Potential and existing client information
- Current sales and sales expected in the future
Along with providing these facts in your summary, you should make sure that this report is written in a professional tone and that it contains no errors. Poorly written summaries could jeopardize your application.
Explain Personal Credit
While your credit will not be a first and foremost consideration for approval, it could play a significant enough role. If you have current or past credit challenges, you should explain the circumstances to the factor.
You likewise should explain what you are doing to repair your credit. If your credit is very bad, or if you have a bankruptcy, your factor may want to implement unique terms or conditions to the agreement.
Use Invoices from Reliable Clients
Along with explaining your credit challenges, you also should use invoices from clients who have good credit and payment histories. These clients' payment and credit records will play a huge role in whether or not you are approved.
If you sell invoices for clients that are slow to pay their bills on time, you risk being declined. Likewise, a factor will not want to buy invoices for which you have already sent out collection notices. A factoring company cannot legally act as a collection agency.
Serve Your Clients Well
Just as your clients' credit and payment histories will influence your approval, so will your own behavior toward your clients. To be approved for factoring, you must show that you have fulfilled your customers' orders on time and that they did not have to wait on you to uphold your end of the agreement.
Your factor will ask your customers how well you fill your orders. If you are on time and can be relied upon, your factor may be more willing to buy your invoices. If you are late on orders, clients are not obligated to pay their accounts, leaving the factor with no way to recoup its money.
Research UCC-1 Rights
By law, only one financier can have the UCC-1 rights to your invoices. If you have a bank loan or any other form of financing, you need to find out if that financier has those rights.
If the bank does have the rights, you may need to have your factor pay off your outstanding loan balance. This process may involve you selling more invoices to fund the payoff. Once that balance is paid, however, the factor can then take possession of the accounts receivables.
Making your factor application as appealing as possible can improve your chances of being approved. These important elements should be included when you fill out an application for factoring.
