The process of invoice factoring is often an excellent option for businesses that are facing an unexpected cash flow shortage. Generally, entrepreneurs may turn to invoice factoring when they are unable to qualify for a traditional type of financing such as a bank loan or a corporate credit line. However, there are certain qualifications that company owners must meet before they can have their invoice factoring requests approved. Here are a few of the conditions you'll have to meet in order to qualify for invoice factoring.
1. Customers with excellent credit
It's true that business owners don't need sparkling credit in order to get invoice factoring. However, their customers must have an excellent credit history, particularly when it comes to making their invoice payments. You'll need to use invoices for customers who have a habit of paying their accounts on time and in full in order to make sure your factoring request is approved.
2. Invoices that have already been issued
Another qualification for invoice factoring relates to the type of invoices you're trying to factor. Factoring companies will only accept invoices that have already been issued, proposed invoices or invoices that are being planned for future work won't be accepted as part of the agreement. Your invoices must also be reasonably timed with a payment term of 90 days or less. If you have a practice of extending invoices with long payment periods those invoices won't be accepted for factoring.
3. A clean company background
While your company doesn't need to have good or established credit to get approved for factoring, it does need to have a clean financial and tax background. As a rule, your company needs to be free of tax complications and bookkeeping issues to qualify. If your company can clear a background check, you'll probably be able to get your factoring request approved.
4. A clean company owner background
Along with the company's financial state the owners of record also have to be clean of legal or financial issues. Expect the factoring company to do a public record of search of the backgrounds of you and any other company directors. This may also include personal issues that are unrelated to the business but are still matters of public record such as past bankruptcies or criminal history.
Qualifying for invoice factoring isn't complicated but it does carry a few requirements for business owners. When you find out what you need to qualify for invoice factoring you can decide if pursuing this arrangement will really benefit your company.