Peel Some Layers Before Funding Invoices

You’ve read the books, attended the training classes and finally have landed your first real prospect. They are eager to get started factoring their invoices and you can’t wait to get this deal closed. Whether you are working as a broker, business development officer or direct funder, this is the starting point where you will need to connect the dots to see if the deal will move forward or be declined.

What Is The Business Trying To Achieve By Funding Invoices?
Before the credit reports are generated, UCC-1 (s) filed, or any other piece of due diligence is started, it is really important for you to understand what the prospect is trying to achieve by obtaining your services. Sure, we all know the easy answer is that the applicant is looking for cash flow for their business. This is where you start to put the pieces of the puzzle together.

If the company is in a growth phase where they need additional cash flow to keep up with orders then it’s probably a good reason to move forward. However, temper this by looking at the company’s profit and operating margins. We have come across several companies that are growing but not making a profit because they have either expanded too quickly or agreed to produce a higher volume at too low a margin. Conversely, if a company is scaling back then you should know why they are taking this course of action. Is it because sales are declining or are they just tightening their belt as a result of being bloated from accelerated growth?

Peeling Back The Layers
We have found that no two deals are exactly alike even if they are producing goods or services within the same industry. For example, we have funded two clients in the apparel industry with the same customer. It was clear that the one client, who was labeled a “preferred vendor” with that customer, received preferential treatment with shorter payment terms and greater flexibility in getting the purchase order fulfilled. It’s almost equivalent to a person with a higher credit score getting a better rate on a mortgage loan than someone with less than perfect credit.

One of the biggest misconceptions about this industry is that factoring companies will fund almost anyone as long as their customers have good credit. Our position has always been a strong account debtor is a great starting point but not enough to close the deal on its own.

So often I see new factors getting in this business and do not take the time to really understand the entire picture of the factoring deal. This business is so much more than just checking boxes off on an underwriting list. Understand what your client does, the relationship they have with their customer and why they are utilizing factoring for their business. In the end both you and your client will be better off in the long run.

This article was written by our president Don D’Ambrosio and originally published in Factoring Investor on February 24, 2014.

Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California.
For more information, he can be reached at don.dambrosio@oxygenfunding.com or you can visit his company’s website oxygenfunding.com

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