Invoice factoring companies have a unique set of requirements that usually don’t include measuring a business’s individual credit or time in business. However, there are restrictions on the type of invoices that can be factored, the creditworthiness of a business’s customers, and even the volume of invoices that need to be factored to qualify.
Standard Invoice Factoring Company Requirements
We evaluated more than 30 companies and their minimum requirements across multiple industries to come up with our list of standard invoice factoring requirements. Keep in mind that individual factoring companies may have different requirements. When deciding if invoice factoring is best for your business, understanding the minimum requirements is important.
Business-to-Business (B2B) or Business-to-Government (B2G) Invoices
Most invoice factoring companies require that invoices are generated B2B or B2G to be factored. This is largely due to the difficulty in determining the creditworthiness of consumers and their ability to repay a major invoice. We found no factoring company willing to accept consumer invoices.
Invoice factoring companies also rely on the creditworthiness of a business’s customers. While there is no specific cut off for credit score, invoice factoring companies look for timely payments. Customers that make timely payments, are usually not late, and are otherwise predictable in their handling of outstanding invoices are more likely to be considered. On the other hand, customers that pay invoices sporadically and unpredictably are unlikely to be factorable.
Sales of $5,000 or More per Month
Invoice factoring companies spend a great deal of time and money making sure customers are creditworthy and, therefore, require a minimum volume of invoices to make up for those initial costs. The lowest minimum volume we found was $5,000 per month. Most invoice factoring companies require at least $10,000, and some require as much as $50,000 in invoices to be factored per month to qualify.
Incorporated in the United States
Like most lending institutions, invoice factoring companies are restricted to funding companies incorporated in the US. This restriction results largely from know-your-customer (KYC) regulations, which financial institutions must follow to avoid inadvertently funding terrorists or other restricted organizations.
Minimum Profit Margins
The majority of the invoice factoring companies we evaluated set a minimum profit margin for certain industries to offset the risk of uncollectible invoices. In most cases, the riskier the invoice or industry, the higher the required profit margin the factoring company requires in the agreement. This ensures that, if one out of five invoices is not collected, there is still sufficient capital to sustain the business and offset lost factoring fees.
Liens and Encumbrances
While we found some invoice factoring companies that would provide funding even if a business had outstanding liens or encumbrances, it is much more difficult to qualify. For this reason, we expect business owners who have outstanding liens or encumbrances may need to get those resolved before they can qualify for a factoring agreement.
Specific Industry Restrictions
Almost every invoice factoring company we evaluated has specific industry restrictions. Usually, this pertains to industries they prefer to fund or ones that they cannot work with. For example, most factoring companies won’t work with the construction industry because of the way contracts are structured. However, there are also construction factoring companies that specialize exclusively in these types of contracts, so it’s important to select a factoring company that’s experienced in your industry.
Selecting a Factoring Provider Based on Requirements
Small business owners shouldn’t focus exclusively on requirements unless they’re having difficulty qualifying for any factoring company. The primary concern should always be the rates, fees, costs, and terms that a factoring company offers, followed by whether or not a business can qualify. In most cases, the easiest way to find out whether your business qualifies is to apply and speak to a representative from the company.
Most financing products follow a relatively strict formula for qualifications, including credit score, time in business, and annual revenue. Factoring companies’ requirements vary based on geographic location, industry specialization, and overall economic conditions. For this reason, small business owners need to identify the minimum requirements of a factoring company and ensure their business can qualify for funding.