Factoring 101

Qualifying Business Prospects for Factoring as Sales Qualified Leads

Factoring 101

How to Qualify Your Prospects for Factoring as Sales Qualified Leads

As is often reported, over 80% of business loan applicants are turned down by commercial banks.  Fortunately for you as a factoring agent, approval rates for factoring arrangements are virtually the opposite.  In fact, if a business meets the minimum qualifications for factoring, they are almost always approved and you will earn a commission for your hard work and the referral.

As a true professional, however, it is very important that you know how to qualify a business for factoring prior to submitting it to your sponsor.  Your deal will always be underwritten by the factor very quickly if it is a “legitimate” deal.  As an agent, you should avoid the time wasters or of submitting a deal that is obviously not acceptable to your sponsor or factor.  The lesson below will help you separate the buyable and commission-generating Sales Qualified Leads, from the junk. 

How to Qualify Your Referrals as SQL

Qualifying Your Referrals as Sales Qualified Leads

You’ve generated a lead for business finance from a LinkedIn lead or referral.  Now what?  Fortunately, factoring is one of the most accepted methods of finance worldwide. Remember, as an IACFB Agent, your job is simply to generate Sales Qualified Leads (SQL). When you can identify your lead as an SQL, then you will T.O. (turn over) your lead to your sponsor or sponsor’s BDO. So how can you feel your lead is Sales Qualified? There are two documents you can request from your prospect that can quickly tell you if your lead is Sales Qualified. These are the:

  • Company Profile
  • Accounts Receivable Aging Report

Step One: Get the Prospect to Complete a Company Profile

In most cases, getting a completed Company Profile will tell you everything you need to know about the prospect and its ability to qualify or not qualify for factoring. Once in hand, here are three (3) things to look for immediately.

  • DOLLAR VOLUME OF RECEIVABLES NOW OPEN: If a business has no accounts receivable (invoices), it is not a prospect for factoring, and any additional time spent on this lead is likely wasted.  THERE MUST BE ACCOUNTS RECEIVABLE TO FACTOR.  Even small balances are eligible for factoring. Upcoming sales from a new client to be invoiced will likely qualify for setting up a new account. However, a company that does not invoice customers is not a factoring client.
  • TAXES AND TAX LIENS: If a tax lien is present or tax payments are in arrears, try to find out the balance involved and also if a payment plan with the IRS is in effect.  Tax liens are not necessarily deal- breakers, but must be dealt with. Agreements must be in place that will eliminate the IRS’s ability to levy payments due from purchased customer accounts and prime the factor. 
  • BANK LOANS OUTSTANDING: As you know, the factor will require a senior secured 1st lien position in accounts receivable in order for a factoring arrangement to be put in place.  If bank loans are evidenced on the Company Profile, talk to your prospect to try to determine if the loans are secured by real estate or if by equipment rather than secured by accounts receivable.

Step Two:  Get an A/R Aging Report

Always try to get a current accounts receivable aging report from the prospect if possible.  This report, generated from the prospect’s accounting software, will document the current receivables outstanding, the names of the account debtor (customer), and how long the invoices have been outstanding.  

It is not uncommon for a business owner to seek factoring in the hope that the factor will buy invoices that are way overdue and in jeopardy of non-payment.  If you see an aging report with a large percentage of past-due invoices, there is a problem, and it’s unlikely the deal will be accepted.

Common Submission Mistakes

As you should now know, deal submission as a factoring agent is deceptively simple, but there are several very common mistakes made by “newbie” agents, and they almost always involve identifying the type of financing needed.  As a new freelancer, you will understandably be excited when you get your first completed company profile, but don’t let your excitement allow you to make any of the following mistakes.

Purchase Order Funding and Contract Mobilizations

A purchase order (PO) is a document issued by a buyer to a seller, indicating the types, quantities, and agreed prices for products or services. PO funding refers to the financial arrangements that allow a company to fulfill its purchase orders. This typically involves third-party financial institutions providing the necessary capital to suppliers or manufacturers to produce and deliver the goods or services specified in the PO. The funding is usually short-term, tied directly to the specific purchase order, and repaid once the buyer fulfills their payment obligations.

Contract funding, on the other hand, involves financing based on long-term contracts between businesses and their clients. This type of funding is often utilized for projects or services that extend over a longer period, such as construction projects or large-scale service agreements. Contract funding ensures that the contractor has the necessary cash flow to meet operational expenses and deliver on the contract terms. Unlike PO funding, which is short-term and specific to individual orders, contract funding provides broader financial support throughout the duration of the entire contract.

As an agent, your sponsor may have support and resources for the financing for purchase order finance since virtually all purchase orders become an invoice item once the goods have been delivered or services performed.

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