David Estrakh and Sadie Keljikian, Express Trade Capital

You’ve done your research, vetted private lenders and banks, and found the funding arrangement you need. You’re ready to enter a factoring agreement. However, before you do, you should know that all factors will require some business and financial documentation before factoring your receivables. Here is a list of the materials you will need and why factors ask you for them.

1. Factoring Application.

This is step one in your relationship with your factor. The application usually requires basic information, including the name of your business and officers, a description of the business, ownership structure and other general information that helps your factor get to know you professionally. Beyond surface details, the application will often ask you to provide the following: (a) your certificate of incorporation (or the equivalent), (b) federal ID number, (c) owner’s photo ID, or (d) other state or federal documentation. This is to verify your business’s details and protect the factor from fraud and wasting time on companies that are not a good fit.

2. Customer List.

Although many factors include a section in their factoring application that allows you to write in your list of customers, this is sufficiently important to warrant its own section.  Since non-recourse factors rely on the quality of your receivables to provide advances against your invoices, it is of paramount concern that the debtors on those receivables (i.e. your customers) are credit worthy.  Although recourse factors are usually not as concerned as their non-recourse counterparts with the quality of customers comprising your receivables, all factors will want to have at least some idea of your customer base and their credit worthiness.

Non-recourse factors need to know because they are going to underwrite the credit of credit worthy customers and make a lending decision based on their credit determination.  Recourse factors need to know because they might adjust the amounts they are willing to fund based on your customer’s credit-worthiness and because they need to know how likely it is that the invoices will pay on their own to price their lending.  For example, if a recourse factor knows some accounts pay poorly, they know they will have to rely more heavily on their own client’s credit-worthiness to assure payment in the event of default.

3. Corporate tax returns and financial statements.

Not all factors require a company’s tax returns and financial statements but it is a common request. As discussed, factoring companies and banks that provide receivables factoring are generally concerned first and foremost with the creditworthiness of the customers.  However, the client’s financial background is requested sometimes in order to verify sales volume and revenue. Also, recourse factors do want to see that your company is healthy enough to repay receivables advance if your customers default.  If your factor asks for corporate financial details, it is best to present a thorough audit performed by an independent third party accounting firm to provide maximum transparency.  Otherwise, at least make sure the information is clear and accurate or it may affect your lending arrangement and put you in default if the factor later discovers inaccuracies or impropriety.

4. Current aging of accounts receivable.

This is an important part of the equation for several reasons. It provides your factor with a snapshot of your customer list, which is very important to your factor, since customers pay factors directly in most agreements. It also lets your factor know how timely your customers are with their payments and how much bad debt you carry as proportion of your receivables. Since factoring is lending against receivables, your customers’ credit is more important than yours, so it is vital that the customers whose invoices are being factored pay on time.  Since factoring prices depend on expected factoring volume, a good A/R should comport with your own assessment of expected annual sales.  If you ask your factor for a rate given to companies making $10 million or more in sales annually, then your receivables should be substantial enough to support that claim.

5. Copies of any and all UCC filings on your Company.

This is crucial. Factors generally need to have first position liens on receivables and inventory since they are providing funding against these assets.  In order to secure their collateral, factors take a security interest in the assets classes they fund. A first position lien (or “security interest”) means that the factor has priority over anybody else to collect on or seize those assets. For example, if the factoring client declares bankruptcy, the factor is prioritized in benefitting from liquidation of the goods against which they have financed. For non-recourse factors, if the debtor on the receivables goes bankrupt, the lien allows the factor to claim payment of the receivable debt in bankruptcy court.  Thus, without a first position security interest, the factor has minimal security or protection in the event of default.

6. Any current licensing agreements.

When you enter a factoring agreement, your factor relies on the value of the goods you sell. Consequently, should the value of your goods be damaged, your factor would be the one to suffer. If your goods are in violation of a copywrite or trademark, this directly impacts the value of your goods because you will not have a legal right to sell them. Even worse, the licensor may have a legal right to the goods or to legal damages.  Therefore, factors ask for any licensing agreements your company currently holds in order to confirm that you are not in violation of any licenses and thus, that your goods will retain their value.

Like anything, factoring requirements vary from one to the next, but the above should serve as a universal checklist for the most commonly requested pieces of documentation. When you sign on with your factor, do not be afraid to ask lots of questions, especially if you are being asked for any unusual or particularly sensitive information. A good factor will always be able to explain why they are requesting certain information or documentation and should be open to providing Non-Disclosure agreements under reasonable circumstances. If you’ve chosen your factor well, they will be very happy to educate and reassure you about the process.

Factor your receivables with Express Trade Capital.

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After record losses in Q4, online lender On Deck Capital suffered a drop of as much as 24% in their shares Thursday morning. The abrupt drop led Tybourne Capital, the company’s largest shareholder, to sell its entire stake.

Since the company went public two years ago, it has yet to gain profitability and reported a loss of $85.5 million in 2016.

Read more from Wall Street Journal.

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Sadie Keljikian, Express Trade Capital

There are several varieties of trade finance that offer working capital flexibility well beyond that of a traditional bank loan. Whatever causes your particular cash-flow problems, chances are there is a trade finance solution perfectly suited to your needs.

Factoring and Purchase Order Financing are two of the most common varieties of trade financing. Both methods are ideal for vendors who sell large orders to retailers on open terms. Factoring is an agreement whereby you sell your open invoices to a company, known as the factor, and they then typically provide you with approximately 80% of the value of the invoices immediately. Your customer(s) then owe the factor the invoice total and you receive the remaining balance, minus factoring fees, when your customer pays your factor.

Factoring is an excellent solution for those who need payment for their outgoing orders immediately but are reluctant to decline offering open terms to their customers. Since factors usually advance funds based on a percentage of your invoices (i.e. your receivables) the credit line is only limited by how many invoices you can generate. Factoring allows you to fulfill as many large orders as you receive without worrying that your working capital will be held up or depleted by waiting to get paid on invoices.

Purchase order financing (also called “PO funding”) is similar, with some subtle differences. When you apply for PO funding, you must provide accurate, up-to-date purchase orders from your customers. Once the purchase orders are confirmed, you receive a percentage of the total value of the PO. Receiving payment ahead allows you to use those funds to pay for manufacturing and shipping costs which frees up your working capital, allowing you to take on more orders.

If your business has been hindered by suppliers, particularly if those suppliers are located internationally, a letter of credit may be the best solution for you. LCs replace deposits, cost of goods and shipping costs you provide to your suppliers and provide an extra layer of protection for both you and your supplier. A letter of credit functions somewhat similarly to an escrow in the sense that it assures the supplier of payment, but only on the condition that goods are shipped on time and received as expected.

Trade finance allows you and your business to grow and adapt by drastically increasing cash flow on multiple fronts. A growing business has more cash flow issues than most people realize and your company’s growth should be handled carefully, with the help of experts. Trade finance professionals understand that your business needs funding in order to operate and will not trap you in a cycle of debt and inflexible lending terms that will ultimately hurt your expanding business. By following a transactional model, trade financiers target funds to ensure that both the borrower and lender are made whole and protected all throughout.

Learn more about Express Trade Capital’s trade finance solutions here.

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