In yesterday's discussion we gave a basic introduction to the client and customer issues that affect factoring companies decision to set an advance rate for a client.

Today we will take a deeper dive into the specific client attributes that affect advance rate decisions. Remember, for our purposes the term "Client" will apply to the firm selling its accounts receivable to a factoring company:

• Collateral - From my perspective "collateral" is the most important "C" in credit.  I have heard it debated a number of time that "Character" is.  The Problem with character is that it is almost impossible to quantify, and you never know what the quality of someones character is until their backs are up against a wall.  I will save the discussion about accounts receivable collateral in detail until the part of the series.  For our purposes now the collateral we are talking about is non-primary collateral, business assets other than accounts receivable.  This could be inventory, machinery and equipment, patents, real estate or cash.  When a factor knows that they have collateral that they are not lending against to support the receivable advances, they are more likely to be aggressive with advance rates against the primary collateral.  If you have other business assets of value that your finance company is not lending against make sure to bring this to their attention when you discuss advance rates.  

• Guaranty - In setting advance rates the factoring company will always take into consideration the strength of the personal or corporate guaranty that is a secondary source of repayment if the primary collateral, in this case accounts receivable doesn't provide repayment.  If you have strong personal credit and significant personal assets outside of your business make sure to provide that information to your finance company.  A recent tax return or personal financial statement will be very helpful.  I have taken liens on personal securities accounts and real estate as a way to support aggressive advance rates in the past.  You may view this as a temporary support for your business that you wouldn't otherwise have access to unless you sold the securties or real estate.    

• History - There is something to be said for getting to know your finance company and building a solid track record with them.  That way, when the time comes that you need a temporary increase in your advance rate the chances are you will get their support.  If you are looking for a new finance company the history of your business is very valuable.  Try to supply your finance company with historic financial statements.  Also, make sure to provide the report agencies like Dunn and Bradstreet with as much historic information on your company as you feel comfortable with.  

The next installment of this series will focus on the specific attributes of your accounts receivable and customers.