How to Qualify for Invoice Factoring

Here's something that surprises many business owners: qualifying for invoice factoring depends far more on your customers' creditworthiness than on your own business credit. That's because the factor's primary risk is whether your customer will pay the invoice — not whether your business is profitable.

What factors actually evaluate

• Your customers' credit: This is the biggest factor. If your customers are established, creditworthy businesses that pay on terms, your invoices are attractive to factor.
• Invoice quality: Invoices should be for completed, accepted work — not estimates or work in progress. The goods or services should have been delivered and accepted.
• No liens or encumbrances: The invoices can't already be pledged to another lender. If you have an existing filing against your receivables, that may need to be resolved first.
• Your business basics: Factors generally want to see that your business is legitimate and operating — but they're typically far more lenient on your credit score and time in business than a bank would be.
• Industry and concentration: Some industries are favored; having too much revenue concentrated in a single customer can be a concern.

What this means for you

If you've been turned down for a traditional loan because of your own credit or a short track record, factoring may still be available to you — as long as your customers are solid payers. This is why factoring is popular with young, growing, or credit-challenged businesses that invoice established clients.

The fastest way to find out where you stand is to have a few recent invoices and your customer list ready. The evaluation is usually quick, because the question being answered is simple: will your customers pay?