Factoring and Personal Bankruptcy

One of the most common questions our applicants ask is, “If I have bad personal credit but my company’s credit is fine, will my company qualify for factoring?”

There are many schools of thought about how an individual’s personal credit situation affects factoring qualification. It is reasonable to expect certain “surprises” when performing due diligence and background investigation on our clients’ owners. As many are entrepreneurs, it is not uncommon to find personal bankruptcies stemming from past business failure. It is also not uncommon to find judgments, liens and lawsuits.

Generally speaking, none of these items, generally referred to as “blemishes,” should disqualify a factoring candidate. The circumstances that gave rise to these blemishes are more important to consider. For example, many factoring companies will disregard a judgment taken by a medical care provider for non-payment. Other factoring companies will disregard a judgment obtained by other creditors on a case-by-case basis. As a legal matter, the judgment holder has an unsecured claim, and the factoring company does not have to worry about the priority of its claim against the collateral. Owners of businesses that have multiple judgments for unpaid debts speak more to character than anything else.

Interstate Capital does not disqualify an applicant simply because the owner has filed for bankruptcy protection in the past. A bankruptcy filing does not, in our estimation, necessarily equate to bad character. Past business bankruptcies may result from a myriad of causes, including poor business practices, over-reliance on debt, poor sales, mismanagement, bad judgment, and a host of other causes. Many do not point to bad character. We feel that if we are doing a good job of purchasing invoices, we will be paid by our clients’ customers. The causes of business failure should not impact our ability to collect.

Interstate Capital is less sympathetic about federal tax liens, which jeopardize our ability to collect from our clients’ customers. As a legal matter, the existence of federal tax liens places us at odds with the federal government, whose claim against our clients’ assets is superior to ours. In many circumstances, however, it is possible to work with the IRS and factor with existing federal tax liens. In some cases, doing so may require a stand-still agreement or subordination agreement with the IRS. In other cases, particularly when an installment agreement has been negotiated between our client and the IRS, we are able to factor and take from the advances the amount necessary to keep the installment agreement current. In such cases, we would expect the amount of the federal tax lien to be relatively small when compared against the balance of our client’s accounts receivable.

Pending lawsuits also do not necessarily disqualify an otherwise qualified applicant. While the outcome from some litigation may ultimately trigger a default of our agreement, the existence of a suit at the time of application is not considered a blemish.

Author: Tony Furman
Copyright 2009
Interstate Capital Corp.

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