Factoring Denied 1

Factoring is certainly easier to obtain than bank loans. But not all deals will be funded, just like not all bank loans are approved. Business owners might be surprised and disappointed to find their factoring applications rejected, especially where there is an urgent need for the cash flow.

Below are 10 reasons why a factoring application might fail. The author acknowledges the article by Peter Pirri published in the American Cash Flow Journal October 2002, entitled, Deal Killers: 10 Reasons That A Factoring Deal Dies In Compliance.

1. An Incomplete Application – The main reason that funding fails.

• The client may be reluctant to disclose confidential information to the factor
• The client refuses to allow the factor to contact its customers to verify invoices during due diligence
• The invoices presented with the application are not properly prepared and cannot be relied on by the factor to obtain payment from the customer.

2. The Factor cannot obtain a first security interest in the Client’s Receivables

• A prior creditor e.g. a bank, another factor or an equipment leasing company has a prior interest There are existing federal or state tax liens
• Assets are pledged to an insurance company to obtain a performance bond.

3. Payment Terms On The Invoice Are Invalid Or Poorly Documented

• Terms of payment are greater than 60 days from the receipt of goods or services
• There is a dispute between the Client and the customer on the terms of payment
• Payment is contingent on payment from a third party that will be available at a later date
• Invoice does not comply with the Purchase Order and fails to show terms of payment, delivery method, product or service description.

4. Invoice Does Not Represent Fair Value For Goods Or Services Delivered

• The Client may be overbilling, or billing in advance
• Discrepancy between what was ordered and what was delivered

5. Payments Cannot Be Assigned

• The Client’s customer is unwilling to send current and future payments to the factor. This used to be a problem with municipalities and state governments, who were reluctant to deal with third parties. Changes in federal law have removed their ability to ignore a properly drafted Notice Of Assignment.

Source: Peter Pirri, Deal Killers: 10 Reasons That A Factoring Deal Dies In Compliance, American Cash Flow Journal, October 2002.

© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved