Having a finance company reject your application is always difficult. However, knowing how to handle the rejection effectively may help you get financing in the future. This article covers how to handle an application rejection constructively. It covers the most common reasons factoring applications get rejected and provides a strategy to move forward.
1. How to handle the rejection
Many small business owners make the mistake of handling the rejection incorrectly. They react negatively to the underwriting officer who conveyed the bad news. Understandably, the small business owner is disappointed. Just remember that arguing with the underwriter doesn’t help you get financing.
A better strategy is to use this rejection constructively. Take it as an opportunity to get more information about the problem. This approach allows you to create a plan to move forward and eventually overcome it.
Most factoring companies’ representatives will gladly answer questions about your application if you ask professionally. Use this opportunity to get as much useful information as you can. You can use this information to improve your application if you try to apply again.
2. Common reasons for rejection
The factoring company’s feedback is invaluable in helping to determine what went wrong with your application. However, you should do your own assessment as well. The following five questions help you evaluate your situation in more detail.
a) Is factoring a good fit for your company?
The first area you should evaluate is if factoring is the right solution for your business. Business owners sometimes apply for factoring without understanding how it works.
Factoring plans offer great flexibility. However, factoring works only for companies that meet very specific criteria. To qualify for factoring, your company must:
- Work with commercial or government customers
- Work with creditworthy customers
- Have invoices that pay in less than 90 days
- Have unencumbered invoices
- Have no serious problems
Your company isn’t able to get a factoring line if it does not meet these criteria.
b) Was your application package complete?
Submitting an incomplete application is the most common mistake that leads to eventual rejection. It is also the easiest mistake to prevent and fix. Ensure the application is completely filled out and includes all the required information. At a minimum, factoring companies usually ask for the following:
- Certificate of incorporation (or articles of organization)
- Business licenses (varies by industry)
- A/R aging report
- Industry-specific invoicing details
c) Do your customers have good credit?
A factoring company can finance your invoices only if your customers have good business credit. Factors usually check commercial credit using credit bureaus such as Dun and Bradstreet or Ansonia. The business credit report tells the factoring company if your customers pay their invoices reliably. Reports also provide payment trend details which are useful in determining future risk.
d) Do you have an existing loan?
Companies that already have a business loan, line of credit, or similar financing will find it difficult to qualify for factoring. This is because lenders secure their loans using your company’s assets as collateral. The collateral usually includes your accounts receivable. Consequently, the factoring company cannot secure its position against the invoices it is buying.
A factoring company isn’t able to finance your invoices unless it can secure a first-position UCC against them. This is why it is difficult to combine factoring with business loans.
e) Do you have tax problems, lawsuits, etc.?
Factoring companies can work with companies that have tax problems as long as the problems are not too serious. Your company must demonstrate that it has a handle on the situation. It should include a plan to bring your tax payments up to date. Consult a CPA or tax professional if your company has tax problems and needs financing.
Additionally, lawsuits and other problems can cause your application to be rejected. This scenario depends on the scope of the problem and the factors underwriting parameters.
3. Moving forward
After evaluating your current situation, you need to decide how to move forward. This step requires that you balance your objectives against your situation to determine the best strategy.
a) Should you try again?
You must decide whether you want to go through the application process again. This decision is not easy. It depends on your needs, the reason your application was rejected, and the scope of the problems.
Some problems are simple and may be fixed by your company’s staff. These problems include incomplete applications, missing documentation, or updating your accounting system.
Consider working with professionals if your company has serious financial, tax, or legal problems. These problems require specialized knowledge and can be best solved by CPAs, attorneys, etc.
b) Find a company that can work with you
The factoring industry is very competitive. A rejected application does not necessarily mean that you will never be able to factor invoices. Some factoring companies have conservative guidelines, while other companies are more aggressive. It’s a matter of finding a factoring company that is open to working with you.
Consider being upfront about your company’s problems when you first approach a new factoring company. Finance companies appreciate frankness, which helps build trust. Include an executive summary with your new application. The executive summary should be brief and professional. It allows you to explain your situation to the underwriting team and convey how you plan on turning the company around.
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We can provide factoring lines with high advances at low rates. For more information, get an online factoring quote or call us toll-free at (877) 300 3258.