Maintaining a strong cash flow and having adequate working capital for operations and expansion are critical to business success. Yet companies experiencing financial struggles in the past or present can face near-insurmountable road blocks to accessing the funds they need. Fortunately, invoice factoring provides a tried-and-true source of debt-free working capital, even for companies and individuals with financial judgments on their books.
Financial judgments can be a red flag to lenders. When a creditor or collector sues someone for non-payment, they can take their case to court to attempt to collect what the individual owes. If the creditor or collector wins the lawsuit, the court issues a “judgment” in favor of the party seeking to be paid. A judgment against you personally becomes public record. Until that debt is paid off, a judgment against your property and earnings can work against you when you apply for loans for your business.
One of the most common questions applicants for factoring services 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 to find certain financial difficulties when performing due diligence and background investigation on companies and their owners.
As many small- and medium-sized-business owners are entrepreneurs with experience running a variety of companies, it is not uncommon to find personal bankruptcies, judgments, and liens stemming from past business failure.
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. However, business owners who have multiple judgments for unpaid debts raise serious concerns for a factoring company.
During the application process, a factoring company will conduct due diligence research to ensure that an applicant’s company is set up correctly and that its invoices are accurate and free of liens and other encumbrances. The factoring company will research the applicant’s customers’ credit histories and any possible legal and tax problems facing the applicant. The factoring company needs to ensure that current invoices are not earmarked to pay off debts as the factoring company must have the first position on an invoice to get paid before anyone else. When a creditor or collector has first priority on your invoices, you won’t be able to factor those invoices.
Interstate Capital does not disqualify an applicant simply because a business owner has judgments against him or her. Judgments may result from many causes, including medical problems, family setbacks and crises, and other reasons. A financial judgment alone does not point to bad business operations. At Interstate Capital, our management team believes that if we are doing a good job of purchasing invoices, we will be paid by our clients’ customers. The causes of personal judgments for non-payment should not impact our ability to collect.
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.