In the challenging landscape of equipment financing, brokers often face difficulties in closing deals due to the accumulation of short-term debt by applicants and existing clients. This trend is especially prevalent among small businesses under two years old, while even established and larger companies are turning to MCA loans instead of traditional equipment financing.
To overcome these obstacles and boost deal-closing rates, equipment financing brokers can leverage the benefits of invoice factoring. By utilizing invoice factoring, brokers can provide their clients with a valuable solution that improves cash flow and reduces the reliance on high-interest short-term loans. Invoice factoring enables businesses to convert their outstanding invoices sold on credit terms into immediate cash, which can be used for equipment financing or other critical business needs.
With the help of invoice factoring, equipment financing brokers can offer their clients an alternative financing option that addresses their cash flow challenges and increases the likelihood of closing more deals. By highlighting the advantages of invoice factoring, brokers can position themselves as trusted advisors who provide comprehensive and effective solutions for their clients' equipment financing requirements.
Invoice factoring provides a solution by allowing clients to convert their accounts receivable assets into immediate cash (no loan created), enabling them to pay off short-term debt and eliminate the burden of daily or weekly payments to MCA lenders. This, in turn, creates a healthier cash flow situation for business owners. This newfound financial stability can then be presented to underwriters, increasing the likelihood of approvals for clients.
To determine the prospects likely to get approved for invoice factoring, brokers should consider the following factors:
Client needs and challenges: Brokers should have a deep understanding of their clients' financing requirements and the specific challenges they face. This includes identifying cash flow issues, delayed customer payments, or the need for immediate capital to finance equipment purchases.
Asset position: Prospects with a strong receivable based asset position are more likely to be approved for invoice factoring. Key indicators include a balance sheet with a significant amount of receivables that are performing well within a 75-day timeframe. Recurring business and consistent sales also contribute positively to the client's financial stability.
Transferable receivable assets: (No Loan Created): The likelihood of approval increases when a substantial portion of the client's receivable assets can be transferred to cash through invoice factoring. Typically, it is estimated that around 80% of the receivable assets will be converted into a cash asset, providing immediate liquidity. This allows the client to utilize the proceeds for various purposes, such as equipment purchases, vendor payables, or paying off loans that are putting a strain on daily cash flows.
Lien Considerations in Invoice Factoring: Invoice factoring typically necessitates a 1st lien position on accounts receivable assets, requiring the business to be free from any UCC-1 liens held by other lenders. The funds obtained through invoice factoring can be utilized to pay off lenders who hold lien positions. It is important to note that liens on equipment do not interfere with invoice factoring liens since invoice factoring solely encumbers accounts receivable assets and not equipment collateral or proceeds from the sale of equipment assets.
By considering these factors, brokers can identify prospects who are well-suited for invoice factoring and have a higher probability of approval. This enables them to provide tailored financing solutions to clients, addressing their specific needs and improving their overall financial situation. Learn more about Invoice Factoring.