Why Did I not Qualify to Factor my Accounts Receivable?

Posted by Gil Oliva on Fri, Apr 25, 2014 @ 08:00 AM

There are times when a company will contact a factor believing they are in great shape to finance their accounts receivable, in other words, to use their invoices to generate cash flow. One of the first phases in the factoring process is to establish a viable relationship. Sometimes the answer is not what the company wants to hear.

This begs the question, Why am I unable to factor my invoices? There is a general misconception that invoice factoring is easily obtained and it is simple to qualify when a cash flow crisis arises, but not in every circumstance. Why should the answer be no?

accounts receivable While, generally speaking, it can be easier to obtain invoice factoring than it is to establish a loan or line of credit at the bank, the factor will still be looking to make sure your company finances are in good shape.

As part of the invoice factoring process, the factor will initially establish your financial objectives. Obviously you are looking to alleviate cash flow issues but the factor will want to determine exactly why. This is where the initial paperwork comes into play.

There are many articles written about invoice factoring being an excellent choice if your company credit history is less than perfect. While it is true that the factor looks at your customer’s credit rather than your own, this is not the only part of the equation.

Often you may consider invoice factoring because you are in a growth phase, and you need cash flow to operate effectively and keep up with orders. This is an excellent scenario as long as the figures back up the growth, but sometimes this is not the case. For example, you may not be making sufficient profit because:

  • Your margins may be too low to warrant the extra cost burden incurred during a growth phase
  • You have attempted to take on new large orders before you are in a position to make it work.
  • You have increased volume without the ability to pay your suppliers

You may also want to factor because you have made the decision to scale down your business to specialize in one area, or you have realized growth has taken place prematurely. Again, this is certainly a viable reason to factor, but if it is simply because of a decline in sales this may be a red flag.

I must state strongly that all of the issues listed above may still not preclude your company from funding your accounts receivable. The most important point is that an experienced factor will take the time to look at all the information and explain if factoring is going to actually help your business, or ultimately create more problems for you. Establishing a strong customer relationship, in order to make sure the right choices are made, is a fundamental part of the factoring process. It is important that your potential factor can also take you through the decision process when the answer is no, and help find ways to help change the ‘no’ into a ‘yes.’

Bay View Funding has an established history of working through complex issues with potential and existing customers. Each member of the team promises to genuinely and personally provide you with the best answers to your invoice factoring questions, helping to meet the specific needs of your company.

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Topics: Factoring Receivables, Financing Government Contractors, About Invoice Factoring

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