What to Expect During Underwriting
You’ve completed the challenge of finding a factoring company you connect with, and you’re ready to move forward. What’s next? The next step is completing the application and underwriting. This is where you provide information and documentation to the factoring company, and they begin their assessment of your business, its owners, and the receivables. This step is often completed in just a few days. Here’s a comprehensive guide on what to expect during underwriting.
Application and Documentation:
The first step is completing the client application. Many companies offer online applications for convenience and efficiency. They typically take 10 to 30 minutes to fill out. On the application, factoring companies usually request basic company information, a list of owners, details about your receivables, and supporting documents like invoices, contracts, and financial statements. Completing this step accurately sets the foundation for a smooth underwriting process. Once an initial review of the application is complete, the factoring may provide a list of any additional documents they need, which can include your company operating agreement, certificate of insurance, and W-9.
Credit Evaluation:
Factoring companies assess the creditworthiness of both your business and your
customers. They evaluate your historical financial performance, payment history, and your customer’s ability to pay. A review of financials, A/R & A/P agings, and various commercial credit reports does this. They may also evaluate the personal credit of the owners as a means to understand the management of the company. A solid credit evaluation helps the factoring company determine the risk associated with advancing funds against your invoices.
Due Diligence on Receivables:
In addition to reviewing the creditworthiness of your customers, the factoring company will review your invoices as well as the contracts and supporting documents that coordinate with the invoices. This due diligence helps ensure they understand your billing and that it meets the factoring company’s criteria for eligible receivables.
Legal and Regulatory Compliance Check:
Underwriters ensure that your business complies with legal and regulatory requirements. This may include checking for any liens or legal issues that could impact the factoring agreement. If any pending liens or legal issues are found, the underwriter will communicate with you on each specific problem and will discuss any needed remedies. Clearing any legal hurdles is crucial for a seamless funding process.
Terms and Conditions:
After a review of the application and documentation, the factoring company will issue a proposal. This outlines their terms and conditions, including the advance rate, factoring
fees, contract term, and credit limits, as well as any remaining items needed from you to finalize underwriting. Read the proposal thoroughly and ask as many questions as needed to ensure you understand the information.
Communication and Clarifications:
During underwriting, you and the factoring company may communicate several times. They might seek clarifications, additional documents, or information to ensure a comprehensive understanding of your business and its financial health. This is also a great time for you to ask questions and evaluate the factoring company’s communication style before you finalize the deal.
Approval and Contract:
Once the underwriting process is complete, the factoring company will communicate the approval and issue the legal documents for signature. This usually includes the factoring agreement, personal guaranties, and remittance instructions and may include additional documents. For convenience, many factoring companies offer e-signing options. After signing, congratulations, you’re a client! You are typically then introduced to their operations team to begin onboarding and preparations for funding.
Ongoing Underwriting:
After approval, the factoring company continues to monitor the performance of your receivables, financials, and customers. Regular communication and collaboration are crucial to maintaining a healthy factoring relationship.
Understanding what to expect during underwriting empowers businesses to navigate the process with confidence. By providing accurate information, cooperating with due diligence requests, and maintaining open communication, you set the stage for a successful factoring partnership that can positively impact your cash flow and business growth.
