In the process of qualifying a new client for a new freight factoring account, we will pull credit on both our clients’ customers, also called the debtors; as well as the credit history of all principal owners of the clients’ business. Most clients understand why we are pulling the credit of the debtors, because after all, they are the ones responsible for paying the debt. However, occasionally I get asked, Why do you have to pull my personal credit when my customers are the ones responsible for paying the invoice?
The answer is pretty simple. We pull personal credit to see how you manage the money in your personal life. Often times this can be an indicator as to how a person manages their business and consequently how they treat their customers and inevitably how they will treat their factoring company. Fortunately we do not put a ton of weight into a client’s personal credit score. We understand the issues involved with having a challenged credit score and we certainly understand the freight factoring industry. Therefore, we feel that a well managed portfolio can overcome any obstacles that might arise based on a client’s sloppy business management styles.
Another reason we pull personal credit is to look for liens or judgments that may hinder our ability to collect on a particular factoring client’s invoices. If, for instance, a client has a large federal tax lien, the IRS can, and will, step into the picture and demand all payments from existing factored invoices be sent to them, with no consideration as to how much money the factoring company advanced for those invoices. The Federal tax liens will trump any and all rights to collect the invoice payments.
A debtor’s credit in the scheme of things is probably the most important. If a debtor consistently pays between 30 and 45 days, they would be considered a good debtor; the main word being “CONSISTENTLY”. When invoices are paid in 32 days and then 65 days and then 45 days and back to 70 days, it could indicate a cash flow problem with the debtor and it is probably worthwhile to do a little more research to determine why they are paying in such an inconsistent manner. Often times it could just be from a claim on an invoice that took time to resolve or sloppy or missing paperwork with the bill itself. But, only a little research will help determine the real issues.
At the end of the day, the debtor is the one paying the invoice, so their ability to pay off a factored freight bill is obviously important. However, a client that has poor records or poor billing practices can cause more issues with the collection of a factored invoice than the debtor’s ability to pay. Poorly managed loads can have claims and poorly organized invoices will inevitably cause delay and frustration to the client, their factor and the debtor. All parties will suffer.