Planning for Success: The Importance of Prequalification and the Deal Submission Process

11:13 09 June in Blog, Broker Resources

Successful factoring brokers and ISOs who understand the importance of prequalification and the deal submission process for invoice factoring get more deals approved faster and with fewer problems. They develop a strong working relationship with the factoring companies they deal with and build a solid, growing book of business.

Prequalifying the Prospective Client

The most important thing to know when prequalifying a prospective client is what information the factoring company requires to determine if the prospect has the qualifications needed to move forward with the deal submission process.

First and foremost, prequalification with Capstone starts with requesting the Accounts Receivable and Accounts Payable Aging Reports from the prospect. Having these two documents as part of the initial package when you submit a transaction to Capstone will ensure an efficient underwriting process and helps Capstone quickly identify a viable candidate for invoice factoring. 

Copies of relevant documents used in the prospective client’s business, such as invoice copies, service contracts, or subcontracts, must be requested. Always make sure that the information needed by the factor is as complete as possible, as this will help to expedite the process of qualifying the prospect. Capstone will review the documentation and determine if the prospect is a qualified lead.

Once the prospective client is prequalified, Capstone will have a clear understanding of the business’s cash flow needs and can move quickly to approve the factoring facility, as initial information has already been verified.  

The Role of Accounts Receivable and Accounts Payable Aging Reports

The Accounts Receivable and Accounts Payable Aging Reports play an important role in prequalifying the prospective client. Both reports are essential for a factor to determine if the prospect is a qualified lead. 

The Accounts Receivable Aging Report provides information on several important items, including:

  • Identity and history of client’s customers – Confirm that the accounts receivable are B2B and not with individual consumers.  The factoring company will be able to understand their payment history and if there is any concentration.  Many small and medium-sized businesses may only have a handful of customers, and it’s important for the factor to be comfortable with the related exposure. The approval of a client is highly dependent on the financial strength of the client’s customers (“account debtors”) and the quality of the accounts receivable. The report is also used to determine if the business is taking on more credit risk than it can handle.
  • Payment terms and credit risk – This will help the underwriter in structuring the invoice factoring facility.  Generally, eligible accounts receivable are within 90 days aged from the invoice date.  Accounts aged beyond 90 days may be uncollectible, have a problem with the good or service provided, or are waiting on something else to trigger the release of payment.  Older accounts receivable expose the business to higher risk if the account debtor is unable to pay the invoices.  The Aging Report identifies which customers pay slower than others and maybe become a credit risk to the business. Construction contractors may show retainage invoices aged out on their books which are ineligible.  
  • Contra-accounts – These types of accounts exist when the prospective client has a “due to” and “due from” balance with the same party.  In cases like this, it’s possible that the account debtor will offset payment owed to them against the accounts receivable.  These may also be ineligible for factoring.
  • Bonded projects – For clients in the construction industry, it is important to determine if certain projects are bonded. These may be considered ineligible as the bonding/ surety company has first rights to the bonded receivable. 
  • Consignment/ affiliated or arm-length transactions – These are not eligible for factoring.

An Accounts Payable Aging Report will provide additional important insights, including:

  • Overview of how much money the business owes to creditors, vendors, contractors, and suppliers.
  • Existing loans, leases, contracts, and taxes owed.
  • How the company is leveraged.  The report will help identify if the business is overleveraged and carrying too much debt when compared to cash flow and equity, which may be a red flag.
  • Payment practices and financial health of the prospective client.
  • Unusual payments to the owner, related parties, and businesses that are not consistent with the business/industry can be a red flag. For example, payments to a jeweler when the business is a food distributor.

These reports are extremely useful in providing insight into how the business is managed and its cash flow. When the factor has all the information needed, a decision can be made on whether the client is qualified or not. 

Deal Submission Process

If the prospective client receives preapproval, the deal submission process can then proceed. Have the prospect fill out Capstone’s application packet and compile the required documents. Forward the completed packet and additional documents to Capstone.

It is important to follow up with the prospective client to make sure that the packet and additional documentation are provided promptly to avoid delays in the due diligence and underwriting process.

A favorable review of the application and supporting documentation will result in the issuance of a Term Sheet being sent to the client.  Capstone will then be able to work with the client to create a seamless internal transfer and proceed with next steps towards funding the initial transaction.  

Having the proper due diligence items is the cornerstone of the deal submission process and is key for prequalifying a client for an invoice factoring program. Each prequalification requires certain effort which equates to time and expense. Brokers and ISOs will save time and expense, close more deals, and build a strong working relationship with the factoring company by following the prequalification and deal submission process required.  Understanding this process will ensure due diligence requests are handled smoothly, increasing the likelihood of the client being approved.

Capstone has experienced personnel who will work with you and the prospective client to be sure the prequalification, due diligence, and onboarding processes are handled professionally and efficiently every step of the way. Please review our broker resources and give us a call at (212) 755-3636 to learn how we can help you close more deals.

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