While getting approved for factoring financing is much easier than getting approved for other forms of business financing, it does involve doing some due diligence. During this process the factoring company will need to determine that:
- Your company is properly set up
- The invoices are correct
- The commercial credit of your customers
- Your invoices have no encumbrances (i.e. liens)
- Your company is free of tax and legal problems
- The owners of the company are free of legal and tax problems
- Other details on a case by case basis
For many, this seems like a “long” list – however, it represents the minimum of due diligence that a factoring company must do. Some of these items are obvious. We’d like to give you a brief glimpse as to why some of the less obvious items are important to set up a factoring financing relationship.
Items 4 and 5: Invoices, or specifically, the financial rights to invoices can be encumbered through a lien (a type of security interest). A common example is when you buy a house using a bank loan, the bank files a lien against your house. This means that when you sell the house, the bank loan needs to get paid before the individual receives any money. It’s similar for business financing. When you get a bank loan or an invoice factoring plan, the finance company usually assets their 1st position on the invoice by filing a UCC lien. This ensures they get paid before anyone else does.
The factor wont be able to finance your invoice if another party has claimed them as collateral. Liens that originate from judgments can derail the factoring process. Most factoring companies will require the ability to file a 1st position UCC lien against the invoices that they are financing.
Item 5: For invoice factoring to work well, the company’s owners usually need to be free of legal and tax problems as well. This usually baffles clients who usually don’t think their personal issues are relevant. They actually are. A company is only as good as it’s owners. If an owner has legal and tax problems, it’s likely that this will negatively impact the company. Personal legal and tax problems have a nasty habit of quickly becoming corporate legal and tax problems. Factoring companies are very careful in this area and will usually check the owner’s background as well.
Disclaimer: This article is for information only and does not provide legal or financial advice. If you need advice, please consult an expert.