How Do You Qualify for Invoice Factoring? Things to Know
The BitX Capital article, “How Do You Qualify for Invoice Factoring? Things to know,” outlines the typical criteria businesses must meet to access invoice factoring. It emphasizes that the primary qualification is having invoices from creditworthy customers because factors base their decision largely on your clients’ ability to pay rather than your own credit history. To qualify, you generally need a registered business entity (e.g., corporation or LLC), a business bank account, and invoiced work that is complete and free of liens or outstanding claims. Many factoring firms also expect a minimum monthly invoice volume (e.g., $20,000 in receivables) and may consider how long you’ve been in business, the age of your accounts receivable, and the creditworthiness of your customers. Once approved, the factor advances a percentage of the invoice value (typically 75–90%) and collects payment from your clients, returning the remainder, minus fees, after they pay.
How Do You Qualify for Invoice Factoring? Each factoring company has its own guidelines and requirements for qualifying for invoice factoring. Factors are primarily concerned with the creditworthiness of your customers and their ability to pay your invoices.
To qualify for factoring, you must have invoices for completed work from creditworthy clients and no outstanding liens on your A/R that can’t be cleared.
“Todd Rowe, President of BitX Capital, explains the straightforward qualifications for invoice factoring: All you need is $20,000 in invoices or accounts receivable per month and a creditworthy customer—as factoring is not available to individuals.
At BitX, we work with customers in various industries, including public sector, construction, manufacturing, and more. If you have a viable B2B business with strong accounts receivable, we can connect you with a lender to meet your needs.”
Invoices to Factor
When companies use invoice factoring, they are essentially selling and assigning their invoices to a factoring company. The factors will then take over the process of collecting payments on the invoices.
This can change some business processes and communications with clients, since the factors are now managing those interactions.
The first step is to apply to a factoring company and be approved. Once you’re approved, you will identify the invoices to be factored. The factor will then give you a funding advance, typically between 75 and 90 percent of the receivable’s value.
The remaining balance, minus the factoring fee, is rebated or released to your client when they pay. Factoring is a good option for companies that don’t have great credit and need working capital quickly.
It can also be helpful if you have been turned down for a business loan or credit line and don’t want to wait months to get financing.
Creditworthy Customers
Many factoring companies are willing to fund a certain volume of invoices and may require that the invoices be from customers with good credit histories. This is because the factory will be collecting payments on the invoices, and they want to avoid taking a bad financial hit.
If your business can quickly bring in cash by factoring, it can help alleviate concerns about a cash shortage or allow you to take advantage of a new opportunity, like working with a large customer who wants shorter payment terms. Factoring can also reduce the stress of a slow season by providing immediate cash for inventory and payroll.
Because factoring isn’t a loan, and you don’t make recurring payments, it can be a better option for businesses that have been turned down by a bank. They do not want to get tied up in a long-term lending arrangement.
However, even if your company’s credit is not great, it might still be a good option to consider invoice factoring if your clients are creditworthy and bring in significant revenue.
Factoring Application
One of the main requirements that businesses must meet to qualify for invoice factoring is having creditworthy customers. Since factoring companies rely on the credit and payment history of your clients to determine how much they advance you on invoices, it’s no surprise that they won’t work with businesses that have bad credit. Or a high risk of being sent to collections.
Business owners looking to qualify for factoring should also be up-to-date with their taxes and not have any outstanding liens on their accounts receivable. In addition, most factors only work with incorporated businesses that operate within the United States.
Unlike bank credits or lines of credit, which can take months to process, invoice factoring companies can provide cash quickly and easily for qualified businesses. This allows entrepreneurs to grow their operations without being limited by 30-, 60-, or 90-day invoice payment terms, which can result in lost sales opportunities.
Accounts Receivable Aging Report
Depending on the factoring company, they may have other requirements that vary by industry or individual customer. These might include a certain length of time in business, minimum invoice volume, and the ability to verify the creditworthiness of customers and their invoices.
Because they are taking on the risk and consequences of unpaid invoices, factoring companies are careful about assessing the creditworthiness of their client’s customers. They also want to ensure that clients’ customers have sound cash flow practices and will likely pay their invoices on time.
The main requirement is that the company is a registered business entity (corporation or LLC) and not a personal consumer. It should also be clear that the company has not pledged its assets as collateral with other financial institutions, which would limit the amount of funds available for invoice financing. This is especially important if the company has debt or other liabilities on its books.
Business Bank Account
If you want to qualify for invoice factoring, you need to have a business bank account. The factoring company will deposit funds into this account when they purchase your outstanding invoices.
You will also need to have a legally documented business, such as Articles of Incorporation. This is a vital document that proves you own and operate a business.
Your business’s creditworthiness and annual revenue will influence your eligibility for invoice factoring. However, the factoring process relies more on your customers’ creditworthiness than on your own business, unlike conventional financing for businesses.
If you are a small business that needs quick access to cash, you may wish to consider another alternative financing solution, such as a line of credit or merchant cash advance.
These alternatives are quicker to qualify for and do not impact your business’s credit score. They are best suited for companies that work with other businesses and do not sell directly to consumers.
Business Tax ID Number
The business tax ID number is an essential document to have on hand for invoice factoring. This number allows the factor to verify that your company is legal, as well as making sure that your business is up-to-date on its tax payments.
While the creditworthiness of your clients is more important than your own in the case of invoice factoring, a factor will still review your business’s own financial history. A factor will likely not approve your application for invoice factoring if you have significant unresolved debts or outstanding liens.
Unlike most forms of traditional financing, factoring companies prioritize the creditworthiness of your client’s accounts receivable over the credit history of the company that owns your business.
This makes invoice factoring a good option for businesses that may not qualify for a business loan. In addition, factoring doesn’t require you to put up your own personal assets as collateral for funding, like many other financing options.
Final Words!
If you are looking to qualify for invoice factoring, then follow these steps carefully to ensure a smooth process. BitX Capital is a leading brand offering this service with minimal terms and conditions, making it easier for your business to access the necessary funding.
Make sure to gather all the required documents and verify the creditworthiness of your clients to enhance your chances of approval. Visit our website and Apply Now!
FAQs: How Do You Qualify for Invoice Factoring
It is a financial transaction in which a business sells its accounts receivable (invoices) to a third party (a factor) at a discount. The lender then collects payment from the business’s customers.
To qualify for invoice factoring, you must have invoices for completed work from creditworthy clients and no outstanding liens on your accounts receivable. Your business must also have a business bank account and be a registered business entity (corporation or LLC).
Typically, factoring companies provide funding advances ranging from 75 to 90 percent of the invoice’s value. The remaining balance, minus the factoring payment, is rebated or released to your client when they pay.
Many factoring companies prefer to fund invoices from customers with good credit histories. This is because the lender will be collecting payments on the invoices and wants to avoid taking a bad financial hit.
Invoice factoring provides quick access to cash without necessitating a long-term lending arrangement or recurring payments. It can be an attractive option for businesses with credit challenges or those seeking to avoid the lengthy approval process associated with traditional financing.
