Starting a new home-based commercial finance consulting business requires a certain level of business finance knowledge and in particular, knowledge about factoring. Gaining the knowledge is not particularly difficult and especially with quality training materials such as the IACFB’s Factoring 101 Broker’s Guide. Still, no matter how much knowledge you accumulate, it is likely you will make one or two of these common new factoring broker mistakes.
As a common form of small business finance, factoring is actually a relatively simple type of financing and a method used very successfully worldwide to cure cash flow problems associated with terms of payment and slow paying customers. Such cash flow problems are very common to small, fast growing businesses that sell to larger concerns that demand 30, 45, 60 payment terms or longer on invoices for goods delivered or services. Cash flow “mismatches”, where daily or weekly expenses can’t be met due to slow customer invoice payments often surface first when it comes to making payroll and the faster a small business is growing and taking on more, large, slow paying customers, the faster working capital is depleted.
Factoring is a ready and easily accessed financial solution for such companies and from a prospecting standpoint for consultants, it is relatively easy for factoring brokers to identify companies that fit the demographic of…
- Potential Client: Small, rapidly growing business
- Client’s Customers: Large, creditworthy business or organization
- Problem: Large, creditworthy customer takes 30 days or longer to pay it’s invoices
Still, as easy as it sounds to locate and build lists of good factoring prospects, those new to the brokering industry commonly make the following four (4) factoring broker mistakes as they launch their business and begin their adventures in marketing. These four (4) mistakes are…
- NO INVOICES: It is not unusual for new brokers, excited when a financing request form is submitted from their website, submits the prospect to a factor without first speaking with the prospect to identify the amounts and types of invoices (accounts receivable) to be financed. In some cases, the prospect is looking for money to buy a franchise or small business and the request has absolutely nothing to do with factoring. ALWAYS VERIFY THE APPROXIMATE AMOUNT OF INVOICES INVOLVED IN THE DEAL.
- GOODS AND SERVICES NOT PERFORMED OR DELIVERED: A very common mistake made by new brokers is to submit a deal where the prospective client does not have the capital to deliver goods or services and is need of “mobilization” money, contract finance, or purchase order finance. Though invoices may be present, such “pre-ship” invoices are conditional and of no value until the goods have been delivered or services performed.
- CONSUMER RELATED INVOICES: Generally, all factoring arrangements involve B2B (Business-to-Business) sales only and their are only a few unique niches, such as real estate commissions, that defy that rule. For example, a landscaping company that performs services for both consumers and businesses, will only be able to factor those services involving businesses. Those companies dealing only with consumers, will find factoring not available to them
- PAST DUE INVOICES / BAD DEBT: Some invoices are simply not factorable. For example, most factors are not in the business of collecting on bad debt although a few do have separate departments that perform that service. It is not unusual for new industry factoring brokers to find small business owners anxious to unload their bad debt to a factor. Brokers should be wary of any prospective client that is interested only in selling a few invoices that are aged of 90 days.
Avoid Factoring Broker Mistakes. Develop These Three (3) Pre-Underwriting Good Submission Habits
Before submitting a deal to a factor, try to make certain you have the following in place:
- APPLICATION / COMPANY PROFILE: have some form of “company profile” or pre-application form completed which shows the amount of invoices outstanding (at least $25,000) and the number of customers represented. Ideally, ask for an Accounts Receivable Aging Report (A/R Aging) report which will identify the prospects customers and invoiced amount outstanding by age.
- PRINT the CORPORATE FILING: Corporate filings are available for free in virtually every state and are usually housed in the Secretary of State’s website. If possible, make a copy of the record and submit it with your deal.
- INVESTIGATE PRE-EXISTING LOANS: If the prospect lists pre-existing loans when submitting a company profile, this can be a deal breaker if the factor cannot secure a first lien on accounts receivable due to a prior lender already filing a security statement claiming “accounts”. It is not necessarily your job as a broker to complete a UCC search. If your state is one that allows free searching of the UCC database, however, it is simply good practice to view the filing if possible and discuss it with your prospect. Many prospects will be of the opinion that a previous loan is simply a “signature” loan and has nothing to do with the assets of the business. This is, however, seldom the case. In some instances, such filings against accounts can be subordinated or even terminated if the prior lender has additional collateral (such as a home or building) which would adequately collateralize the existing loan.
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