Most factoring applications can proceed quickly if a prospective client does not have significant problems. However, open liens, legal issues, or tax problems affect your chances of getting funding. Knowing how to handle these problems ahead of time improves your chances of success. Here are the eight most common roadblocks to having your factoring application approved or your account funded:
#1 – Incomplete/missing documentation
The most common reason applications are delayed is that they are incomplete. These applications have blank sections or may be missing backup documentation. Without this information, the factoring company is unable to finish its due diligence.
Fortunately, this is the simplest problem to solve. Double-check your application and ensure it has everything the factoring company asks for. Also, you can improve your chances of getting approved by including an executive summary with your application. Few clients provide them. However, an executive summary helps the underwriting team understand your company better.
#2 – Open UCC liens from current lenders
Factoring transactions are structured as the sale of your invoices to the finance company. A factor can buy your invoices only if they are not encumbered by a lien from another lender. However, most lines of credit, loans, and MCAs use liens that encumber your receivables. For this reason, you cannot combine these products with factoring. The factoring company isn’t able to finance your invoices unless your existing lender subordinates their position against your A/R.
#3 – Unpaid federal tax liens (FTLs)
Tax liens encumber your assets which creates a risk for the finance company. Consequently, a factoring company isn’t able to fund your account if there is a tax lien against your company. This is why factoring companies ask for recent tax documents in their applications.
A factoring company may be able to finance your company if you have a payment plan with the IRS and if the IRS agrees to subordinate its liens against your A/R. In our experience, the IRS is open to this arrangement if the finance company agrees to manage the payments. Keep in mind that this agreement does not relieve your company of your liability to the IRS. Rather, the factor agrees to send payments directly to the IRS on your behalf. The payments are made using the proceeds from the advances and rebates.
#4 – Unpaid payroll taxes
Much like item #3, unpaid payroll taxes are a serious problem. A factoring company isn’t able to work with your company unless you have a plan to correct this problem. Additionally, the factoring company will likely require that your company use a payroll processor (e.g., ADP, etc.). This requirement helps ensure that your company remains current with its payroll taxes.
#5 – Open judgments
Open judgments or lawsuits may derail your factoring application process. This outcome depends on the size of the judgment relative to your revenues and the reason for the lawsuit. An unpaid judgment may be perfected into a lien. The lien encumbers your company’s assets and prevents the factor from securing its position.
#6 – Owner with a criminal background
Factoring companies usually perform a background search on the company’s owners. A factor may decline to work with a company if the owner has certain types of criminal backgrounds. This possibility varies by factoring company.
#7 – Uncooperative customers
Getting a factoring account funded requires some cooperation from your customers. Initially, the factor sends them a Notice of Assignment. This document informs your customer of the factoring relationship and provides new payment instructions. It usually has to be acknowledged by your customer.
Factoring companies regularly verify your invoices with your customers. Factors take this step to ensure the invoice is accurate and still open. Verifications can be done using your vendor portal if your customer offers it. Otherwise, the factor needs to contact your customer and verify the invoice by email or phone.
#8 – Customer business credit
Factoring companies can finance your invoices only if your customers have good business credit. Most factors use a credit bureau such as Dun and Bradstreet to check your customer’s credit. Unfortunately, a factoring company isn’t able to help if your customers don’t have good business credit.
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Disclaimer: This article does not contain legal or financial advice. Please consult a CPA or attorney if your company has tax or legal problems.