How to Know if Your Business Qualifies for Sales Invoice Factoring

Factoring. There is a banu with coins in the gear, documents with a truck and a cart with boxes on the sides.

Most B2B Businesses Can Take Advantage of Factoring

Sales invoice factoring allows businesses to collect cash from their invoices as soon as an invoice is issued. The immediate receipt of most of the money due from an invoice simplifies cash flow management and releases funds that can be used for business expansion.

Many businesses in many sectors benefit from factoring. And gaining approval from a factoring company is generally much less of a challenge than getting bank business loan approval. However, not all businesses can take advantage of the factoring opportunity.

So, if you have been wondering if your business would qualify for invoice factoring, read on. This article offers a guide to the qualifying criteria your business will need to meet to be accepted by most invoice factoring companies.

Trading as a Business

Sales invoice factoring is only available for businesses. So, you can expect to be asked for proof of business structure when applying for factoring services. Typically, a factoring company will ask to see the articles of incorporation, articles of organization, or a DBA (doing business as) filing. You will also usually be expected to have a business bank account and a business tax ID.

Issuing Sales Invoices

Of course, your business must raise sales invoices to apply for invoice factoring. So, factoring will not be a suitable financing option for cash-only businesses. Factoring only provides finance against credit invoices issued to creditworthy customers.

Minimum Monthly Sales

Most factoring companies have a minimum monthly sales requirement. The minimum is generally ranges from $25,000 – $50,000. Some companies will also expect to see a business invoicing multiple customers rather than only one. However, most of the qualifying criteria mentioned here vary. So, it is worth shopping around when you are looking for a suitable factoring provider for your business.

Related: Ten Tips to Get Your Invoices Paid Faster

Business to Business Sales

Some factoring companies provide consumer credit factoring services. However, most companies will only factor business-to-business (B2B) invoices. So, if most of your customers are consumers, factoring may not be available for your business.

Credit Terms

You must have clearly defined credit terms for your customers. And those terms must be stated on all your sales invoices. And, if you grant 30 or more days credit, factoring will be an ideal way to turn accounts receivable into cash faster. However, if your business collects sales invoices in only 7-15 days, the benefit of factoring invoices will be limited.

Customer Creditworthiness

A factoring company will be more interested in the credit rating of your customers than that of your company. So, if you have a reasonable number of customers with good credit, you will likely be accepted for factoring. On the other hand, if a significant proportion of your accounts receivables are companies with bad credit, this will probably be an issue for some factoring companies.

 Business Solvency

The financial status of your business is not as critical for applying for factoring as it would be when applying for a business loan. However, most factoring companies will consider the solvency of the business. You might not qualify for factoring if your business has any significant unresolved debts, for example. And you would be unlikely to be eligible if you are in the process of filing for bankruptcy.

Related: 10 Tips for Determining B2B Credit Terms

Domestic Trading

US factoring companies generally only provide sales invoice financing to companies registered in the US trading with US customers. However, if your business is export-orientated, some providers do offer international factoring solutions.

Eligible Sales Invoices

A factoring company buys your sales invoices from you because the customer will later pay those invoices. And, naturally, a factoring company will be looking to minimize the risk of non-payment. So, some factoring providers may not provide financing against certain types of invoices. For example, suppose you buy and sell from an organization. In that case, there is the possibility that you might offset that company’s receivables and payables account at some point. So, contra accounts like these might be ineligible for factoring. Most factoring companies will not finance invoices between related companies for similar reasons. And invoices for long-term contracts or payment in advance might also be an issue.

Background Check

The factoring company may do a background check on the business owner and or officers of the company. So, a history of owning businesses that have entered bankruptcy could affect your chances of being approved for factoring. Having a criminal record will also be a problem, especially if that record relates to fraud or other financial wrongdoings.

Related: 10 Considerations When Selecting the Best Factoring Company for Your Business

The Bottom Line

The above list might at first appear to be a lot of requirements. However, most B2B businesses will qualify for factoring. And it is easier and quicker to get a favorable decision on a factoring application than it would be for a bank loan or overdraft. The requirements also vary for different factoring providers. So, if you are unsure if your business will qualify for factoring, the best thing to do is to inquire with a factoring company to determine if factoring is right for your business.

Your Questions Answered Quickly

Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay, Universal Funding can help your growing company. Call us at 800.405.6035 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.

About Universal Funding

Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.