Invoice Factoring Requirements

invoice factoring requirements

Applying for invoice factoring

Applying for financing can be a process of gathering documents, speaking with finance reps, meetings with your banker, or even just researching which types of financing are a good fit for your business. We understand you are busy running a business. We at Meritus Capital decided to let you know up front what we look for in a potential factoring client. If accounts receivable factoring seems like a good fit for your business, here are a couple things that you can be sure a factoring company will be thinking about when qualifying a prospect.

Validity of the Invoice

A factoring company’s main function is buying invoices in advance of payment at a discount. So of course, the most important thing an accounts receivable factor thinks about when doing this is the following:

  1. What is the likelihood that the customer can pay the invoice; and,
  2. Did the client fulfill the job requirements in an acceptable manner?

Being able to quantify these two things is crucial to being a good factoring prospect or user. Here are these two issues broken down and how invoice factoring companies are able to determine to the best of their ability the risk of these two things:

1. Credit worthiness of the customer or account debtor. Factoring companies will use a few different methods to determine the risk of whether a customer will be able to pay their bills. Often they will use the following:

  • Credit Bureaus
  • Credit insurance companies
  • Payment history
  • If they are unable to get any information from the above three things there are cases where companies utilizing factoring will request financial statements from their customers as they are generally carrying a fairly large amount of credit.

2. The second question is whether or not the invoice being sent to the customer is for a job that was done properly and deserves payment. There are few ways that factors can determine this:

  • Backup documentation – signed time cards, signed field tickets, bills of lading etc. Documents like these help verify to a factor that the invoice they are buying is for work that has been completed to the satisfaction of the customer.
  • Receiving confirmation from the customer - whether that is done over the phone or email, often factoring companies will have to do some verification of the validity of the invoice directly with a customer.
  • Portals – many larger companies will have portals where vendors can go and track payments. This can be a great resource for factoring companies as they can go to the portal and see if an invoice has been approved and when it will be paid.

Viability of a Business

Of course, the point of engaging with an invoice factoring company is usually due to cash flow needs. We understand that and because we are principally relying on the quality of the invoices we are purchasing, business health is not the number one priority for underwriting a factoring facility. That being said, it makes sense for an invoice factoring company to verify that a business has some “going concern,” or will not be liquidating in the near future. So a basic understanding of a business and how it will be moving forward, whether profitably or not, is a general requirement.

Not sure if you will qualify for AR factoring?

Generally, with a brief conversation, a representative at Meritus Capital can determine whether or not factoring would be a good fit for you. Meritus Capital has been providing funding to businesses in the U.S and Canada for almost 20 years and has completed many difficult transactions. Give us a call today at 1-877-648-3709.

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