Asking the Right Factoring Questions

Everybody has an opinion as to how factoring works and the best method to fund deals. Many of the articles I’ve written in the past try to assist the broker and factor from both the sales and operational side of the equation.

Is there a magic formula to use to get more deals closed? We all know there is no secret that will land you more deals, but positioning yourself, asking the right questions and using common sense will sure go a long way.

Unlike a traditional bank loan which requires collateral as security, factoring typically involves advancing funds through the purchase of an invoice. The invoice is an instrument that represents a promise from one party to pay another for delivered goods or services.

No risk at all associated with buying a promise, right?
The Factor must thoroughly perform the necessary due diligence to ensure the deal is legitimate. For new brokers and factors getting started in the business it is important to understand that no two deals are exactly alike even if they are in the same industry. It is our job as both funders and brokers to peel back the layers of correspondence to get to the heart of the deal.

So where do you start?

First, what is the prospect’s motivation for invoice factoring?
Is the company expanding their operations or are they looking for a lifeline to stay above water? For us, we have always found that the shortest distance between two points is a straight line. Therefore we immediately engage with the prospect’s owners and management team to get a forward forecast of the company.

Once you have the big picture view, your next job should be to focus on past performance which leads us to our second point. Try to get as much pertinent information about your client as possible. Your client should be able to gather tax returns, financial statements (audited if possible), current and historical accounts receivable aging reports, agreements, etc. As a former CFO of a publicly traded company, I know that numbers may not give you the entire story but they surely will give you a lot of chapters in the prospect’s book.

In some instances you will run across prospects that have been in business for less than a year. In this example you will not have a tax return, some interim financial statements and very light account receivable history reports. These deals will require you to think out of the box. Always examine the prospect’s experience in his or her current industry.

If someone has just started an apparel company but worked their entire life in the mortgage industry, you might want to give it a closer look. Your next move should be to look at the quality of the account debtor and their current contracts for goods and services. Experience has taught us that new companies who win contracts with A+ account debtors frequently have excellent prior experience in the industry.

Finally, use common sense.
We like to refer to our red flag rule. You might be able to get away with a blemish here or there but if the flags are waving like a speed car race, you have a problem. Red flags can range anywhere from omitting pertinent information on the application to excessive liens and delinquencies on a credit report. The good news is that you will find most prospects to be honest and trustworthy when trying to get funded on invoices.

Remember, read a prospect’s entire book before you move forward on a deal otherwise yours might be a very short story.

This article was written by our president Don D’Ambrosio and originally published in Factoring Investor on May 13, 2013.

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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