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How to Qualify a Factoring Prospect by Asking Three Simple Questions Video - YouTube
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How to Qualify a Factoring Prospect by Asking
Three Simple Questions
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I recently wrote an article on factoringinvestor.com
entitled, âHow to Qualify Factoring Prospects
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by Asking Three Simple Questionsâ, and I
wanted to elaborate on that article in this
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video blog post.
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I wanted you to picture this scenario: if
youâre a factoring broker â say you had
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a business owner approach you.
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Theyâre in need of cash flow assistance;
theyâve been in business for a year, they
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have three large customers that routinely
pay in thirty days.
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Youâre really excited about the prospects
of finding them a factor; you have one in
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mind.
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You call the factoring company.
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They say yes; theyâre interested; theyâll
be in touch after they make contact â and
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the next day you get a phone call from that
factoring company saying theyâre no longer
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interested.
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Iâd like to go over three simple questions
that you can ask your factoring prospects
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to make sure that this type of scenario never
happens again.
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The first question to ask when pre-qualifying
a factoring prospect is, âAre you receivables
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free and clear to be purchased?â
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the answer really affects whether a factoring
company is going to want to pursue this deal
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or not, because a factoring company uses accounts
receivable as collateral to secure their fundings.
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Basically, in the event that a factor doesnât
get paid, in the long run something goes bad,
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the factoring company can lay claim to the
receivables and still collect out â even
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if the business itself closes down.
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What the factoring company does to ensure
this is filing a UCC-1 on the business ownerâs
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receivables.
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Basically, the way UCC-1 is: it stands for
the âUniform Commercial Codeâ, and it
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alerts other funding companies that if they
intend to use collateral for a business owner
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to secure a loan, that there is another funding
company that is already entitled to that collateral
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in the event that the company closes its doors.
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If the receivables are not free and clear
to be purchased, then a factoring company
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is automatically going to be a little less
interested in the deal.
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If a little bit of a balance is left on a
loan, and the business owner is able to pay
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that off, it may be that the company can use
its initial funding with the factoring company
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to pay down that loan.
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Then, a factoring agency is going to be a
little more interested in the deal.
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If there are hundreds of thousands of dollars
owed on a loan, or if there are hundreds of
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thousands of dollars outstanding with another
factoring company, then the current factor
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is going to be a little less interested in
moving forward with the deal.
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The second question to ask all of your factoring
prospects is, âAre you behind on your taxes?â
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and if the answer to that question is âYesâ,
then the next follow-up question is âHow
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much do you owe?â.
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Just like when another funder files a UCC-1
on the receivables of the business owner,
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the IRS is the only entity who can trump a
factoring companyâs UCC-1.
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Basically what happens is, if youâre behind
on your taxes, the IRS tries to get your attention
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by filing an âIntent to Levyâ on that
companyâs assets.
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Now, this includes both physical assets like
equipment, computers, fax machines, telephones,
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office supplies, things like that.
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And, it also includes assets â liquid assets:
bank accounts, receivables, things like that.
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So, if a business owner owes a lot in taxes
and there is not a payment plan in place,
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a factoring company is going to be a lot less
interested in pursuing that deal.
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Now, in some cases, factoring companies can
work with business owners who owe taxes, provided
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that they can show that there is a re-payment
plan in place and that the re-payments are
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being made in a timely and orderly fashion.
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The third and final question you want to ask
your factoring prospects is âWho do you
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bill?
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Who are your customers?â
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Basically, in order for the factoring model
to succeed, you want to have a smaller business
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that is less established; maybe a start-up
company, only been in business a year or two,
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and theyâre selling to really large, established,
creditworthy customers â because basically,
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then, the small business can leverage off
their customerâs credit.
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The factor is going to look at the debtors,
the customers of the clientâs, and analyze
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their ability to repay the invoices that the
factor is buying.
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So as long as a smaller business is selling
to a large entity, the factoring equation
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works out fine.
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Where it breaks down is if a smaller business
is selling to other small companies that arenât
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so creditworthy, or that havenât been in
business for a long time⊠and routinely,
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I see deals turned down especially when the
business owners are selling to private individuals
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(because itâs really hard for a factoring
company to establish credit and get comfort
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with a private consumerâs credit, and/or
when their clients are billing debtors that
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take a really long time to pay.
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Now, what is a really long time?
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It depends on the industryâs standards:
for example, in a medical staffing industry,
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itâs typical to see payment terms of thirty
to sixty days, whereas in another industry,
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that may be too long for a factoring company
to consider buying an invoice.
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So, basically I want you factoring brokers
to keep in mind that if you want to avoid
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the scenario I started talking about in the
beginning of this video blog, to ask these
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three questions: âAre your receivables free
and clear to be purchased?â; âDo you owe
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any taxes and if so, how much?â; and âWho
are you billing?â â and that way, youâll
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be better prepared to present a good factoring
candidate to a factoring firm in the future.
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For more information, please visit PRN Fundingâs
website at www.prnfunding.com.
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