I grabbed this picture of the skull and crossed bones because if you are working with a factoring company or asset based lender, and they make a big portion of your invoices ineligible, it could mean the death of your company's working capital.  ALSO, IT JUST LOOKS COOL...doesn't it?!?

In this series of articles we will discuss the different categories of "ineligibles", and strategies to keep your invoices eligible with your factoring company or lender.  The first thing we should discuss are the most common categories of ineligibility, and why factors and asset based lenders make them ineligibile. 

• Accounts 90 days past invoice date, or 60 days past due date:  Becuase factors and asset based lenders will never know your customers as well as you do, if an invoice goes beyond 60 days from due date, the chances are they are going to make that invoice ineligible.  If an invoice has gone unpaid for two months, there is most likely a "story" behind it, and a prudent lender needs to be conservative.

• Cross Aging:  This is a category that is mostly used by asset based lenders.  It is a relatively simple formula that is applied to your customers total accounts receivable.  Lets use an example of what happens with 25% cross aging.  lets assume that your firm has $100,000 due from one customer. If 30% of the total due from that customer, or $30,000, goes beyond 60 past due, then the lender will make all receivables due from this customer ineligible.  The lender is taking a conservative approach, "if more than 25% of the total accounts due from that customer are ineligible then I dont want to lend against any of those receivables".

• Foriegn Accounts:  In general, factoring companies and asset based lenders don't want to finance invoices where your customer is out of the country.  This has become more of an issue as the velocity of international business increases with advances in technology and the Internet.  The lender's thinking is that it will be difficult to collect these accounts (in the worst case scenario) because they don't understand the laws of the foreign country and there may be a language issue, among other things. 

• Related Company Accounts:  I can't think of any lenders that would be willing to lend against invoices due from a company that has common ownership with its borrower. There are many issues that make this dangerous for a lender, but the biggest is fraud.  

• Contra Accounts:  This issue may arise if you are selling to, and buying from the same company.  The risk to the lender is that this company could decide to offset the receivables owed to you, against what you owe them, making the collateral that your lender or factor is advancing against worthless.

• Accounts Related to Product Samples:  Lenders make these ineligible for the simple fact that most invoices for samples aren't paid.  

• Accounts that are the product of lengthy contracts: Remember how I said above that your lender will never know your customer as well as you do?  Here is a prime example. Lenders aren't able to spend the time analyzing and monitoring your accounts, and may not have the expertise in your industry to make them comfortable when lending against lengthy contracts.

In our next article we will discuss some strategies to help you keep your accounts eligible.  

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