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  • How to Qualify a Factoring Prospect by Asking Three Simple Questions

  • I recently wrote an article on factoringinvestor.com entitled, “How to Qualify Factoring Prospects

  • by Asking Three Simple Questions”, and I wanted to elaborate on that article in this

  • video blog post. I wanted you to picture this scenario: if youre a factoring brokersay

  • you had a business owner approach you. Theyre in need of cash flow assistance; theyve

  • been in business for a year, they have three large customers that routinely pay in thirty

  • days. Youre really excited about the prospects of finding them a factor; you have one in

  • mind. You call the factoring company. They say yes; theyre interested; theyll be

  • in touch after they make contactand the next day you get a phone call from that factoring

  • company saying theyre no longer interested. I’d like to go over three simple questions

  • that you can ask your factoring prospects to make sure that this type of scenario never

  • happens again. The first question to ask when pre-qualifying a factoring prospect is, “Are

  • you receivables free and clear to be purchased?” the answer really affects whether a factoring

  • company is going to want to pursue this deal or not, because a factoring company uses accounts

  • receivable as collateral to secure their fundings. Basically, in the event that a factor doesn’t

  • get paid, in the long run something goes bad, the factoring company can lay claim to the

  • receivables and still collect outeven if the business itself closes down. What the

  • factoring company does to ensure this is filing a UCC-1 on the business owner’s receivables.

  • Basically, the way UCC-1 is: it stands for theUniform Commercial Code”, and it

  • alerts other funding companies that if they intend to use collateral for a business owner

  • to secure a loan, that there is another funding company that is already entitled to that collateral

  • in the event that the company closes its doors. If the receivables are not free and clear

  • to be purchased, then a factoring company is automatically going to be a little less

  • interested in the deal. If a little bit of a balance is left on a loan, and the business

  • owner is able to pay that off, it may be that the company can use its initial funding with

  • the factoring company to pay down that loan. Then, a factoring agency is going to be a

  • little more interested in the deal. If there are hundreds of thousands of dollars owed

  • on a loan, or if there are hundreds of thousands of dollars outstanding with another factoring

  • company, then the current factor is going to be a little less interested in moving forward

  • with the deal. The second question to ask all of your factoring prospects is, “Are

  • you behind on your taxes?” and if the answer to that question isYes”, then the next

  • follow-up question isHow much do you owe?”. Just like when another funder files a UCC-1

  • on the receivables of the business owner, the IRS is the only entity who can trump a

  • factoring company’s UCC-1. Basically what happens is, if youre behind on your taxes,

  • the IRS tries to get your attention by filing anIntent to Levyon that company’s

  • assets. Now, this includes both physical assets like equipment, computers, fax machines, telephones,

  • office supplies, things like that. And, it also includes assetsliquid assets: bank

  • accounts, receivables, things like that. So, if a business owner owes a lot in taxes and

  • there is not a payment plan in place, a factoring company is going to be a lot less interested

  • in pursuing that deal. Now, in some cases, factoring companies can work with business

  • owners who owe taxes, provided that they can show that there is a re-payment plan in place

  • and that the re-payments are being made in a timely and orderly fashion. The third and

  • final question you want to ask your factoring prospects isWho do you bill? Who are your

  • customers?” Basically, in order for the factoring model to succeed, you want to have

  • a smaller business that is less established; maybe a start-up company, only been in business

  • a year or two, and theyre selling to really large, established, creditworthy customers

  • because basically, then, the small business can leverage off their customer’s credit.

  • The factor is going to look at the debtors, the customers of the client’s, and analyze

  • their ability to repay the invoices that the factor is buying. So as long as a smaller

  • business is selling to a large entity, the factoring equation works out fine. Where it

  • breaks down is if a smaller business is selling to other small companies that aren’t so

  • creditworthy, or that haven’t been in business for a long timeand routinely, I see deals

  • turned down especially when the business owners are selling to private individuals (because

  • it’s really hard for a factoring company to establish credit and get comfort with a

  • private consumer’s credit, and/or when their clients are billing debtors that take a really

  • long time to pay. Now, what is a really long time? It depends on the industry’s standards:

  • for example, in a medical staffing industry, it’s typical to see payment terms of thirty

  • to sixty days, whereas in another industry, that may be too long for a factoring company

  • to consider buying an invoice. So, basically I want you factoring brokers to keep in mind

  • that if you want to avoid the scenario I started talking about in the beginning of this video

  • blog, to ask these three questions: “Are your receivables free and clear to be purchased?”;

  • Do you owe any taxes and if so, how much?”; andWho are you billing?” – and that

  • way, youll be better prepared to present a good factoring candidate to a factoring

  • firm in the future. For more information, please visit PRN Funding’s website at www.prnfunding.com.

How to Qualify a Factoring Prospect by Asking Three Simple Questions

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