How Do You Qualify for Invoice Factoring? [Plus List of Required Docs]
If you’re considering invoice factoring as a way to get working capital for your business, figuring out how you qualify for invoice factoring is an important step. (As a reminder, invoice factoring is a business financing method where a factoring company pays your outstanding invoices quickly. You get easy funding in days by skipping the wait for customers to pay on net terms. Another term for invoice factoring is invoice financing, but factoring and invoice financing have key differences.) We’ve outlined the basic criteria you’ll need to meet, along with materials you’ll need to have, to get approved with the best invoice factoring companies.
One important caveat: every factoring company has their own specific requirements for approval. We’ve done our best to keep the steps and process general, while letting you know when a point is specific to FundThrough’s invoice factoring service.
1. Ensure Your Business Qualifies for Invoice Factoring
The first step you’ll need to navigate when figuring out how to qualify for invoice factoring is ensuring that you have the type of business a factoring company typically works with, as listed on their website. This can include requirements like:
- Sell to other businesses. Small businesses must have invoices billed to other businesses (or governments), so invoice factoring isn’t a fit for businesses that sell to consumers, only B2B businesses.
- Be in certain industries. Some invoice factoring companies only work with certain industries, or will work with most industries but have exceptions for industries that they won’t work with.
- Not have an unmanaged tax balance. This can depend on the company. Some factors might work with small businesses who have tax balances with the IRS or CRA as long as they have a payment arrangement. FundThrough works with clients who have managed tax balances all the time.
- Be located in certain countries. Many invoice factoring companies only work within certain countries or continents. Not all offer cross-border factoring plans.
2. Ensure Your Customer Is Creditworthy and Responsive
Another important aspect of qualifying for the invoice factoring process is that you must have credit-worthy customers. Your ability to get funded depends more on your customers’ ability to pay their outstanding invoice than your own credit history, unlike conventional financing for businesses. If your clients have a poor credit rating and/or a history of late payments or being sent to collections, there’s a higher chance they won’t be approved and you won’t get funding. On the flip side, how your customer relationships are managed by the factor is critical; many business owners understandably worry that key customer relationships could get damaged if a factor hounds their customer for payment. See our approach to customer contact put your mind at ease.
Also, getting your funding hinges on your customer signing an NoA (notice of assignment), a document certifying that the customer will redirect payment to the factoring company. This requires your customer to be responsive. The factor then needs to verify that the invoices are real, and that the work was completed. Anything you can do to help get these steps completed will speed up the process of invoice factoring.
3. Ensure Your Invoices Qualify for Invoice Factoring
When completing the factoring application process, the unpaid invoices themselves must also meet certain criteria depending on the factor company and your invoice factoring agreement.
- Have invoices of a minimum amount. Many invoice financing companies will only factor invoices, or several invoices to one customer, that meet a minimum dollar amount or monthly invoice volume. Some may require you to factor all invoices for a specific customer. At FundThrough, you can choose individual invoices you want to factor.
- Have invoices for completed work. The unpaid invoices have to be for work that’s already been done. Many companies also won’t finance invoices that are more than a few months old. (At FundThrough, invoices need to be less than 90 days old.)
- Have invoices either free of liens or other encumbrances, or have liens that can be removed. Some invoice factoring companies will work with small businesses who have outstanding liens on their A/R.
List of Documents Needed to Qualify for Invoice Factoring
After understanding how you can qualify for invoice factoring, keep in mind you’ll also need to send the factor certain documents proving your business and identity. Again, this depends on the factoring company, but there are some common documents for invoice factoring.
- Business formation documents such as LLC certificates, Articles of Incorporation, or some other proof of business
- Personal identification document such as government-issued photo ID (eg., driver’s license or passport)
- Void check from your business bank account
- Copies of the invoices to factor
How Do You Factor an Invoice
Now that you know how to qualify for invoice factoring, you might be wondering how do you factor an invoice? Again, every factoring company has their own specific process for how to factor an invoice. We’ve once again kept the steps and process general, while letting you know when a point is specific to FundThrough.
1. Apply and get approved. Create an account with an online factoring company get started factoring invoices. Submit any documents needed for the factoring application. Unlike with other forms of financing, there are no credit checks as factoring approval relies on you having creditworthy clients.
2. Choose invoices to get funded. Once you are approved for receivable financing, you will be able to select the invoices you want to funding in days for. If you are using a factoring company like FundThrough, you can integrate your Quickbooks account to submit eligible invoices directly from the online portal.
3. Verify customer and invoices. The factoring company will then verify the customer’s creditworthiness and the invoices’ authenticity. After your clients sign the NoA and the invoices are verified, your request will move to the next step.
4. Get funded. Once the invoices are approved for funding, the factoring provider will transfer payments for invoices to you, minus any factoring fees. You can enjoy having access to cash within a few business days for improved cash flow.
5. Your customer pays the receivable factoring company. Your customer then makes the invoice payment directly to your invoice factoring partner. After that, there’s no further obligation. You can factor again at any time to turn invoices into cash, smoothing out any cash flow issues.
FAQs: How to Qualify for Invoice Factoring
You probably have some more questions about invoice factoring. Here are some of the most common questions we hear from our customers.
Who is eligible for invoice factoring?
Invoice factoring eligibility depends on what type of business you have, where you’re located, the type of industry you work in, and whether or not you have any outstanding liens or tax balance. You’ll also need to work with creditworthy customers, who aren’t at risk of not paying their outstanding receivables. Finally, you’ll need to have eligible outstanding customer invoices. A factor may have minimum volume requirements for invoice factoring.
How do you get approved for a factoring company?
To get approved with a factoring business, you’ll need to follow their procedures for initial account setup, provide the necessary documents, have credit-worthy customers, and qualifying invoices for customers. See if you’re approved for FundThrough in less than 5 minutes.
Do you need good credit for invoice factoring?
No, you don’t need good business or personal credit scores. Invoice factoring companies care more about the creditworthiness of your customers since the factor is depending on them to pay their invoice. Even if you have bad credit or poor credit history, many business owners will be pleased to learn they can still qualify for factoring as a receivable funding option, unlike traditional forms of business financing.