Factoring is often easier to qualify for than a bank loan. That does not mean anyone gets approved. Factors look closely at your invoices, your customers and anything that could stand between them and getting paid.
What factors look for in your business
Business-to-business or government invoices
You need invoices owed by businesses (B2B) or government agencies (B2G). Invoices to consumers generally do not qualify.
The invoices should be for work already completed or goods already delivered. Invoices for future work, deposits or partially finished jobs are harder to factor.
Creditworthy customers
The factor is buying the promise that your customer will pay. So your customers' payment habits matter a great deal. A young business with strong, established customers can often qualify. A long-running business with slow or shaky customers may struggle.
Clean title to your receivables
You must actually own the invoices you sell, free of competing claims. This is called clean title. The factor will want to be first in line to collect those receivables.
Existing liens
If a bank, equipment lender or merchant cash advance provider already filed a UCC financing statement that covers your receivables, the factor will see it in a lien search. You may need that lender to release its claim, subordinate it, or sign an intercreditor agreement. The chapter on UCC filings explains these options.
Taxes
Unpaid federal taxes can create a federal tax lien on your property, including receivables. That lien can compete with the factor's interest. Expect questions about payroll taxes in particular. If you are on an IRS installment agreement, say so up front. Many factors can work with a plan that is current.
Other things that may come up
- Pending lawsuits or judgments
- Customer concentration (one customer making up most of your sales)
- A history of disputes, returns or chargebacks
- Whether your contracts with customers forbid assignment of payment
How factors check your customers' credit
Since your customers will be paying the factor, the factor studies them closely. Common steps include:
- Pulling business credit reports on each customer
- Checking the customer's payment history with the factor or with other lenders
- Looking at public records, such as liens, lawsuits and bankruptcies
- Reading your A/R aging to see how quickly each customer has paid you
- For trucking, checking a freight broker's operating authority and payment data
The factor then sets an approved limit for each customer. Invoices to unapproved customers, or above the limit, may not be funded.
Documents you will usually be asked for
Each factor has its own list. These are commonly requested:
- Application with basic business and owner information
- Accounts receivable aging report, showing open invoices by customer and how old they are
- Customer list with contact details for billing and accounts payable
- Sample invoices and supporting documents, such as proof of delivery or signed timesheets
- Articles of incorporation or organization and proof of good standing
- Government-issued photo ID for each owner
- Business tax returns, and sometimes personal returns
- IRS Form 8821, which lets the factor receive your tax account information from the IRS so it can confirm whether you owe federal taxes
- Voided business check or bank letter, so the factor can send your advances
- Copies of key customer contracts, especially in construction, government and healthcare
Having these ready before you apply can shave days off the process.
The underwriting process
Underwriting is how the factor decides whether to work with you and on what terms. Steps often run in this order:
- Initial call or intake. The factor learns about your business, your customers and how much you want to factor.
- Preliminary proposal. Some factors send a short proposal or term sheet early, so you can see likely terms before doing all the paperwork.
- Document collection. You submit the documents listed above.
- Lien and background searches. The factor searches UCC filings, tax liens, judgments and litigation. It may also run background checks on owners.
- Customer credit checks. The factor approves customers and sets limits.
- Invoice verification. The factor may contact customers to confirm a sample of invoices.
- Final approval and contract. You receive the factoring agreement to sign.
- Setup. The factor files its UCC-1, sends notices of assignment to your customers, and sets up your portal access.
The proposal or term sheet
The proposal is a summary of the main terms. It usually lists the advance rate, fee schedule, reserve, recourse terms, minimum volume, contract length and any setup or service fees.
A proposal is usually not binding. The final agreement controls. Compare the two carefully and ask about anything that changed. The chapter on the factoring agreement explains how to read each term.
How long it takes
There is no fixed timeline. In general:
- Simple files with clean liens and well-known customers can move from application to first funding in a matter of days.
- Files with existing lenders, tax issues or government contracts usually take longer, sometimes a few weeks.
- The slowest steps are often outside the factor's control, such as getting a release from a current lender.
Frequently asked questions
Can I factor if my business is new?
Often, yes. Factors care most about your customers' ability to pay. You will still need to show the work was done and that you own the invoices free of other claims.
Will a factor approve me if I owe back taxes?
It depends on the amount, whether a lien has been filed, and whether you are current on a payment plan. Be upfront. Hidden tax problems are a common reason deals fall apart late.
Why does the factor want IRS Form 8821?
It authorizes the IRS to share your tax account information with the factor. That lets the factor confirm whether federal taxes are owed that could lead to a lien on your receivables.