How to Improve Your Invoice Factoring Application

Invoice factoring lets a business convert its outstanding invoices into cash by selling them to a factoring company or factor for a fee. Unlike traditional loans that often require personal credit scores as part of the application and approval process, factoring lines of credit are typically backed by a company’s assets and are the primary consideration for approval.

Follow these seven ways to increase your chances of getting approved by a factoring company.

1. Form an LLC or Similar Business Structure

Factoring companies are concerned about fraudulent companies with unverifiable invoices because they offer a form of asset-based lending. This means that you need to demonstrate the legitimacy of your company to improve your odds of getting approved. Forming a limited liability company (LLC) not only reduces your personal liability, but it also demonstrates business savviness that factors would want to see in an invoice factoring applicant.

2. Register Your Business with the Secretary of State

Registering your business with your secretary of state is important because factoring companies will verify that your company is indeed a legitimate business. Factors will check to see if you are in good standing with your secretary of state and if you are current with your taxes. Therefore, registering will help you improve your invoice factoring application and get approved for financing.

3. Create a Company Website

It’s important to have a comprehensive business website to establish your online presence. Unfortunately, even though most customers search online when they need to find certain products or services, not all companies have active websites. Factors and other easy business loan providers find it more difficult to establish a company’s legitimacy if they don’t have a website.

4. Increase Your Personal and Business Credit Scores

Most factors won’t do a hard credit check, and a personal credit score is not the primary criterion they use to approve your invoice factoring application. Still, it’s important to maintain good personal and business credit. Your credit score reflects how creditworthy you are and can help.

Review your personal and business credit reports regularly to ensure they contain accurate information. Some factors report your payment history to credit agencies, and this will help build your business credit. Finding a factor that reports to credit bureaus will not only help you meet your temporary need for working capital, but it will also help boost your business credit score.

5. Start Factoring With a Big Client

The client invoice you choose to factor is one of the most important criteria for getting approved for invoice factoring. Most factors only accept invoices from business-to-business (B2B) and business-to-government (B2G) companies. To ensure that your application will be considered, choose an invoice from a big and stable customer.

An invoice from an established client will go a long way toward convincing factors to fund your business because a large, stable customer is likely to pay its invoice on time. Because factors make a percentage of your invoice, a large invoice would incentivize the factor to accept your application.

6. Keep Good Documentation

It is essential to have business documents at the ready, including signed customer contracts, purchase orders, and customer information. You’ll need these to back up your invoices and expedite the application process. Since invoice factors typically require you to integrate your accounting software, maintain good records, so the information they pull is accurate and updated.

7. Make Sure You’re Aligned With Customers

With any invoice you attempt to factor, make sure that you’re aligned properly with your customers. Ensure that your customer verifies the service has been completed and agrees to a specific date on which the payment is due. The payment details indicated on the invoice must be accurate, specific, and properly acknowledged by your customer.

Bottom Line

Small businesses can convert their slow-paying invoices into immediate cash to solve their cash flow problems through invoice factoring. Because credit scores are not the basis when you improve your invoice factoring application, invoice factoring is ideal for businesses that don’t have enough credit history. Be well prepared for your factoring application using the above tips to ensure you’re approved.