10 Tips to Maximise Your Chance of Getting Approved For Factoring
Below we have put together 10 tips to maximise your chance of getting approved for a factoring faciltiy.
1) Keep Your Trading Simple
The key thing that a factoring company is looking for is to ensure that the underlying debts, against which they providing funding, are simple and straight forward and hence easy to be collected in in order to recover the finance that they have provided through the factoring facility.
It is common for factoring companies to suggest that respective clients slightly alter the way in which they trade in order become more suitable for factoring but if you take these steps prior to speaking to a factoring company it can only enhance your chances of being approved. In order to simplify the nature of your debts, you should ensure that invoice's are only raised after the goods have been delivered or the services provided. In addition, any documentation that can be obtained to support the debt, for example proof of delivery or proof of provision of the service should be retained. Factoring companies do not favour businesses that take deposits in advance or businesses that invoice single transactions in a number of stages.
2) Provide a Clear Audit Trail
The factoring company will want to understand the way that the paperwork concerning a sale flows through your business. The ideal audit trail (the paperwork concerned with a particular transaction) would start with evidence of an order from the customer. There would then be some form of proof of delivery or proof of provision at the relevant service and this would be followed by production of an invoice. These should be filed with any remittance's that are received from the customer when their payment is received.
By establishing a clear audit trail prior to applying for a factoring facility, you will be making the factoring company's job as easy as possible as they are able to see the evidence of historic transactions and take comfort in the fact that there will be a robust set of documentation to support future transactions against which they are going to provide finance.
3) Tidy Up Your Sales Ledger
Whilst as part of the factoring arrangement you may be seeking to hand over the credit control function and the management of your sales ledger to the factoring company, it will improve your chances of being approved for factoring if you tidy up your sales ledger prior to making your application for a factoring facility.
To do this, you should chase any outstanding debts, to minimise the level of overdue invoicing which will be something that will deter a factoring company. In addition, any credit notes that are due should be issued and any old bad debts should be clearly identified. The chasing notes associated with your sales ledger should be brought up to date so that the factoring company can easily evaluate the sales ledger.
4) Be Clear About The Reasons Why You Want A Factoring Facility
Factoring is a working capital finance facility that provides funds to be used within your business. If those funds are used for another purpose, such as buying capital equipment, the cash that was available within your business will be reduced and your application will be less attractive to a factoring company. Funding for capital purchases should be sought through other means such as hire purchase or leasing and the funding from your factoring arrangement should be used for the purchase of stock, materials and payment of creditors within your business. Once you have a factoring facility in place, which will provide funding immediately you raise new sales invoices, you may be able to qualify for early payment discounts from your suppliers.
5) Be Open With The Factoring Company
Factoring companies do not like surprises such as discovering outstanding County Court Judgement's or associated companies that they were not aware of. In order to optimise your chances of being approved for factoring, you should be open with the factoring company and provide them with full details of any potential issues in advance. They are likely to be far more sympathetic if they feel that you are being up front with them.
6) Have The Key Facts About Your Business To Hand
Your initial meeting with the factoring company will far go far more smoothly if you have arranged to have the relevant information available for them. They will want to know the turnover of your business, the average size of invoices and the number of debtors that you deal with in order to cost your facility.
They will want to look through a debtors aged analysis and a creditors analysis together with other financial information such as bank statements (these may be required at a later time). In addition, the factoring company will want to discuss the nature of your trade and to look at examples of invoices and other supporting documentation in order to access it's suitability.
7) Ensure That Your Invoices Are Legally Correct
You should ensure that you are producing invoices that are going to be legally enforceable. This means that they must be raised with your correct details shown on them, the exact trading style of your business and your other information including VAT number, registered address and registered number of your business. You should confirm that the trading styles of your debtors are correct and ensure that terms of payment are clearly printed on each invoice. In addition the invoice should clearly break down the services or goods that have been provided, the costs and any VAT element. The invoice should be dated and the factoring company will be seeking to ensure that the date of the invoice follows the delivery of goods or the provision of the services.
8) Have Your Latest Set Of Financial Figures Available
The factoring company may well wish to see your historic financial accounts and any management accounts, particularly if you are seeking a Confidential Invoice Discounting facility. You should ensure that they are as up to date as possible.
9) Be Able To Demonstrate That The Funding Received Will Be Sufficient
One of the key concerns of a factoring company is to ensure that they are going to be able to provide enough funding for the needs of your business. You should anticipate this concern and produce a cash flow forecast that demonstrates that the funding received from the factoring facility is going to be enough to ensure the continuation of your business. One of the key concerns of a factoring company is not to enter a situation where they are unable to provide sufficient funding to ensure the continuity of a business. The last thing that the factoring company wants is to have to try and recover their outstanding funds from your outstanding sales invoices.
10) Know Who Your Debtors Are
Bearing in mind that the factoring facility is based upon the value of your outstanding sales invoices, one of the key considerations of the factoring company is the nature of the debtors that you are dealing with. Therefore, you need to be very clear about who they are. You should seek confirmation of the correct trading style of the businesses that you are dealing with so that you can be sure that your invoices will be raised to the correct legal entity. This will help the factoring company quickly assess the nature of your debtors and in cases where Non Recourse Bad Debt Protection is being provided it will speed up the process of writing credit limits for your debtors.
The 10 tips above are some of the key aspects of your business that the factoring company will consider when looking to approve your business for a factoring facility. There are of course other aspects which may be considered but if you address each of the above points you will maximise your chances of being approved for a factoring facility.
