Due diligence is the investigation a factor carries out before it starts buying a company's invoices. It aims to confirm that the business is what it says it is, that its receivables are real and collectible, and that no other creditor has a superior claim.
How it works in factoring
Typical steps include:
- Application and identity checks: business formation documents, ownership, government IDs for owners, and confirmation that the business is in good standing with its state
- UCC search: looking for existing liens on receivables; any found must be released or subordinated
- Tax checks: often using IRS Form 8821 to confirm payroll and income taxes are current
- Receivables check: the aging report, customer list, sample invoices and proof of delivery
- Customer credit checks: commercial credit reports on the main account debtors
- Background checks: litigation, judgments and bankruptcy history for the company and principals
- Industry-specific checks: for example, operating authority for trucking or license status for healthcare and staffing
For a new client, the factor may also contact a sample of customers to verify open invoices.
Why it matters
Due diligence protects the factor, but it also affects the seller's timeline. Missing documents and unexpected liens are the most common causes of delay.
What to check
Before you apply, gather your formation documents, a current aging report, a customer list with contacts, recent invoices with delivery proof, and tax filings. Search your own UCC record. Being ready shortens the process and avoids surprises.
Due diligence also runs both ways. A business should check a factor's contract terms, fee schedule, and history before signing.