Four common application mistakes can lead to a funding delay or a rejection of your factoring application. This article provides suggestions to avoid these mistakes and improve your chances of getting funding. Lastly, we provide a strategy to handle transactions in which the company (or owner) has negative information.
Mistake #1 – Hard-to-read applications
Submitting a hard-to-read application is the most common mistake prospective clients make. It’s also the easiest to fix. Many prospective clients fill out the applications by hand, scan them, and email them to the factoring company. It’s not unusual to get applications with sloppy handwriting and other problems. This creates two potential problems.
The first problem is that the application is hard to read. This sloppiness may also reflect poorly on you and your company. The underwriting team is left wondering if that is how your company is managed. Additionally, sloppy applications increase the time it takes to process them. This delay reduces your chance of getting funded quickly. The underwriting team needs to contact you to confirm information they can’t understand. The solution is simple. Type your applications or use the factor’s online form.
Mistake #2 – Missing sections/information
There are two categories of applications that have missing information. The most common category is when a client is in a hurry and overlooks some sections. Sometimes, the prospective client omits information because they are uncomfortable sharing it. Unfortunately, both situations may reflect poorly on you and your company. The factoring company could get the impression that you are trying to hide something. Remember that the finance company can proceed with a proposal only after they have everything they need to make a decision.
Mistake #3 – Missing backup documentation
Factoring applications must also include supporting information. The type of information factoring companies request varies by transaction. However, most factoring companies ask for A/R aging reports, tax information, and financial reports.
The factor must receive all backup information before the application can be processed. Incomplete applications often end up in delays. Fortunately, solving this problem is easy. Double-check your application and make sure it has everything the factor asks for.
Mistake #4 – Deceptive information
Purposely providing misleading information is the most serious mistake an applicant can make. This deception will result in your application being declined immediately. Furthermore, the factoring company will likely decline any opportunity to work with you in the future. Providing misleading information never works in the long term. It always works against you.
Factoring companies cross-check all information as part of their due diligence. They also search public records for corporate or background issues. This process enables them to catch inaccuracies.
How to handle negative information
Some business owners may be tempted to embellish their applications or omit critical facts because they fear their application may be rejected. This concern is understandable. However, omitting critical information or purposefully adding inaccurate information always backfires. Trying to deceive the factoring company will only make them suspicious and more likely to decline the application.
Factoring companies are used to working with businesses that have challenges. They understand that no business or situation is perfect. Factors can work with many difficult situations as long as the business owner is trustworthy. You must be forthcoming about issues and have a reasonable plan of action.
a) Be upfront about problems
The best approach to handling factoring application problems is to be upfront about them. Explain the problem calmly and professionally. This method may sound counterintuitive, but underwriting teams respect business owners who are honest and direct. It may not guarantee you get funding, but it works better than hiding information.
Consider including an executive summary with your application that explains the situation. Describe your company’s problems, how you managed them, and how factoring will help turn the company around. Few prospective clients write an executive summary, but due diligence teams appreciate them. The executive summary is your chance to communicate directly with the due diligence team.
The executive summary should be concise, well-written, and free of grammatical errors. Consider having a business associate proofread it to ensure it conveys your story correctly.
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Disclaimer: This article is provided for informational purposes only and is not intended as legal/financial advice. Please get competent financial/legal advice if you need it.