The Factor Guru

Tips on accounts receivable financing and business practices.

Scottsdale Bound a guest blog by Darla Auchinachie

Mar 11

Posted by Darla in General Information | No Comments

In six weeks, factoring executives will convene in sunny Arizona for the 2010 Factoring Conference.  I’m getting excited at the prospect of seeing all the folks I’ve met from past meetings.  From business acquaintances, to clients, referral sources, mentors, colleagues and even the dearest of friends – many of them will be in Arizona to interact and learn.  During each day there will be informational sessions and speakers who will provide insightful information and each evening provides opportunities for professionals to forge new relationships or solidify existing bonds.  I really don’t mean to make this sound like an advertisement as I write this I realize it may come across this way.  I guess that I am just a little fired up about seeing old friends and meeting new ones too.  You see I am proud to be a part of the factoring industry – I find that most of the people involved in this industry are exceptionally smart, somewhat boisterous and inherently generous.

I have received some phone calls this past month from newer entrants to the factoring industry asking me about this conference and if it is worthwhile to attend.  I respond, with full disclosure that I am actively involved with supporting the IFA and say wholeheartedly “OF COURSE!  This conference is a must for any professional associated with receivables finance in any way.”  I say if you can only afford (both in terms of time or money) to attend one conference each year then this is the one.  Yes, you can probably purchase an audio CD after the event – but that’s only half of the draw.

The people that you will meet at this conference you are likely to develop relationships with that will serve you well over the course of your career or through the growth of your company.  I’ve watched alliances form over the years… folks that met each other for the first time who nine, ten, and even 12 years ago are now engaged in participations together, have bought and sold portfolios amongst each other, and have hired one or another in various roles.  I’ve met owners of factoring companies who started with nothing and have grown their portfolio to wild heights.  I’ve met others who have built up a portfolio, sold it, and are now in their second round.  Sad to say, I have seen folks come and go too.  I’ve met new business development people who have moved up the ranks to sales managers, account executives who have moved up to operations managers, operations managers who have moved up to portfolio managers – and many of those will go on to start their own companies.  The amazing thing is that almost all of them will take a moment to provide advice and share war stories, or in general, they are just pretty fun to be around.

It is important to note that it is not just other factors who attend this meeting; Vendors, service providers, attorneys, complimentary businesses also are in attendance – these too can be healthy contacts for you. For example, I really enjoy the folks over at 20/20 Tax Resolution, Ansonia Credit, MotherFund and First Corporate Solutions just to name a few. They know their business and the factoring industry well. Think about it: Where else can you interact with the likes of Mike Ullman, John Beckstead and Steve Kurtz? Even the face reader guy, Mac Fulfer, is scary “spot on” with his observations, and Brian Van Nevel (who must have been a game show host in a past life) will channel his inner Alex Trebek for a very educational round of Factoring Jeopardy.  The creator of the Factor Guru blog, Genevieve Merritt, will be there as well as all the other contributing writers such as myself, Scot Pierce and Rich Eitleberg.

So if you haven’t already signed up… I’d be thinking of doing that soon.  The room block ends this weekend – I hope to see you in Scottsdale! It’s sure to be an educational and productive event.

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A Look Back and Ahead

Mar 3

Posted by Gen Merritt in Operations | 1 Comment

2009 was a tough year. That is all I hear. For the existing portfolios, revenues were down for the most part last year; some publications have noted a 20% to 40% downturn last year resulting from the economic decline. Note that much of this may be dependent on the industry in which a factor may have a niche. Factors have been increasing their monitoring procedures to stay more in tune with their clients’ businesses and collateral performance. More research and credit limit adherence is being required for debtor credit. Think about what it says when bankruptcies increased 25% to 50% over 2008; tax lien filings increased over 25% from the prior year.

For new business, many of us have looked at more and more prospects to ultimately only fund the same number of deals. Issues arising from the economy last year have spurred additional due diligence and research on these prospective clients to ensure a long standing relationship will exist, or can exist in the first place. The question that always comes to mind: can you get out tomorrow?

So, where does that leave 2010? Well, we are well into the first quarter and business opportunities have been increasing, provided you have the capital available… but that is another discussion for another day.

By now, you hopefully have already evaluated your portfolios to determine areas of potential loss and/or weakness. You have also by now identified areas of improvement in your operations and portfolio management to help ensure proper checks and balances internally. For an extreme example, does your account manager handle the verifications, daily fundings, collections, and payment application for their clients? How would you know if something arose that should be a red flag? Maintaining appropriate checks and balances can be critical in today’s environment. Establishing certain communication protocols both internally and externally can prove to be invaluable within an operations department.

The recent increase in deal flow should, however, not equate to reducing the recently increased monitoring and account management standards. This year will be just as challenging for many as last year. Time and time again, I hear that factors are going back to the basics: maintaining verification and collection efforts, monitoring collateral trends in purchases and cash  management, reviewing and adhering to debtor credit limits, and understanding the billing of the client and what they do (i.e., industry in which they operate, etc). Factors are also paying more attention to early warning signs that may be indicators for potential concerns.

All I can say is be prepared… be proactive and not reactive, as they say. Surprises are not always a good thing.

Wishing You Continued Success. The Factor Guru.

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Big Sanctions in Bankruptcy Court a guest blog by Scot Pierce

Feb 10

Posted by Gen Merritt in Collections | 1 Comment

With the current state of today’s economy, dealing with account debtors and clients who are in bankruptcy has become a way of life for factors.  As a result, many factors have become very proficient dealing with bankruptcies and know the basic rules.  But even some of the most sophisticated financial institutions can still run dreadfully afoul of one of the most basic tenets of the bankruptcy code–the discharge injunction.  And if you are caught, you can be in a for a very expensive lesson.

Last November, a bankruptcy judge in the Northern District of Texas issued an opinion in Danny and Kimberly McClure v. Bank of America, Creditors Financial Group LLC and Peter Rebelo, 2009 WL 4263365, (N.D. Tex. 2009) that reminds us of the consequences of violating the discharge injunction.  Danny and Kimberly McClure filed for bankruptcy protection in July 18, 2007 and received a discharge on November 15, 2007.  Among the debts discharged were personal guaranties on two Bank of America credit cards in the names of their business.

After the couple’s debts had been discharged, Bank of America referred the credit card debts to a collection agency.  Bank of America testified that they knew the debtors had filed for bankruptcy when they referred the case to the collection agency.  As an aside, this is not the kind of testimony that you want to have.  Bank of America essentially admitted that they willfully and intentionally violated the discharge injunction.

When the collection agency received the placements, they performed an initial bankruptcy scrub, but used the tax identification number from the business that Mr. McClure owned instead of Mr. McClure’s social security number to run the scrub.  Because of this, they failed to learn of the bankruptcy discharge.

The collection agency then assigned each credit card to a different collector.  The first collector performed an Accurint search and found Mr. McClure’s social security number.  In spite of this, he did not perform another bankruptcy scrub.  That collector then contacted the McClures for payment.  Mr. McClure testified that the collector told him that someone was likely headed to his house and that the collection agency would be filing a lawsuit shortly if he did not pay.  The very fact that the court mentioned this testimony in the opinion indicates that the court was disturbed by the collector’s tactics.  At that time, Mr. McClure informed the collector that he had received a bankruptcy discharge.

The first collector then entered the bankruptcy information into the collection agency’s system and apparently ceased his collection efforts.  But the second collector, who was assigned to collect the debt owed on the other credit card, did not have access to this same information so he sent a collection letter and attempted to contact the McClures for payment.

That triggered the debtors filing a motion for contempt for willfully and intentionally violating the discharge injunction.  The debtor requested attorney fees, damages and sanctions against Bank of America, the collection agency and the second collector.

After hearing the evidence presented, the court denied recovery and sanctions against the second collector.  The court, however, did find that both Bank of America and the collection agency willfully and intentionally violated the discharge injunction.

The court awarded the debtor $79,839.14 in attorney fees and $2,500 in actual damages both jointly payable by Bank of America and the collection agency.  The court also awarded a separate $100,000 sanction against Bank of America and $50,000 sanction against the collection agency.  Each party’s sanction would be suspended and need not be paid if the president or  general counsel of each company submitted an affidavit within 90 days detailing how their procedures had been changed to prevent this from happening again in the future.

A number of lessons can be learned.  Among them is to ensure that you have adequate procedures in place to protect against violating the discharge injunction or automatic stay.   Also, be careful who you refer delinquent accounts to for collection.  I believe there is at least a possibility that Bank of America would never have been sanctioned if the collection agency had not had faulty procedures that triggered the debtor to complain to the bankruptcy court.  I also believe the strong arm tactics that the collection agency used made the situation worse.  The bottom line is you should check your procedures to ensure that once your company becomes aware that a debtor is in bankruptcy or has a received a discharge–stop collection efforts immediately.

About the author:

Scot Pierce is a partner with the lawfirm of Bracket & Ellis, P.C. located in Fort Worth, Texas.  He has represented a number of factors with commercial litigation and bankruptcy issues.  He also regularly writes articles and presents speeches on creditor issues.  He can be reached at 817/339-2474 or spierce@belaw.com.

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A Call to Action: Regulatory Awareness

Jan 23

Posted by Gen Merritt in Economy | 1 Comment

no moneyWith the events surrounding CIT, many businesses and publications have noted an increased awareness on the importance of factoring. This was considered a good thing: educating the public on the value that factoring brings for small businesses across the U.S.  After all, CIT’s rise and later fall was not attributed to their factoring division.

And yet, CIT’s other business segments combined with other nonbank, unregulated, newsworthy companies that failed in 2008 and 2009 have shed new light on something referred to as “Shadow Banking,” which many believe is to blame for the recent economic crisis.  What began by general comments during a speech in 2008 has evolved into a full out mission.

Unfortunately, this new light may ultimately and indirectly impact the factoring and asset based lending (ABL) communities at large, which would also adversely affect small businesses.

How so? As early as February 2010, rumblings in the marketplace have noted that staffers may begin preparing new legislation in the regulatory reform bill, which is intended to regulate the Shadow Banking segment. Some believe, including the American Factoring Association, an advocacy arm of the IFA, that both factoring and ABL companies could be inadvertently bundled under the category of Shadow Banking.

Note, however, that the majority of these factoring/ABL companies are nonbank, unregulated financial institutions that provide ongoing working capital to small businesses. These are predominantly independent financial institutions. Their sole purpose is to provide capital to companies that simply do not qualify for traditional bank lending; they do not engage in the trading of derivatives or collateralized debt obligations. They do devote their energies towards accurately valuing the most liquid assets of a business such as receivables and inventory.  Funding is not provided based upon past financial performance, time in business, or even future earnings or performance of a business. This alternative form of finance is very different, while often misunderstood.

In the January 8, 2010 publication for The Deal, one article noted final legislation should be made public near “the end of 2010 for 2012 implementation. This means uncertainty will prevail for the bulk, if not all, of next year.” This article focused on mortgage securitization and other forms of finance, however, and not specifically Shadow Banking. With that said, many of the items addressed may also be included in the next legislative bill.

What are possible inclusions for this new bill? For one, possible tightened capital requirements for banks that finance factors and/or ABLs, thereby potentially limiting financing resources, or raising the cost of financing for factors and ABLs. In the article mentioned in The Deal, one possibility would be not just to tighten capital requirements but to assess standards for “fixed capital requirements for various types of risk-weighted assets.” Knowing that many of the companies using factoring and ABL services are not considered bankable, what would their risk weighting be considered?

Moreover, the ramifications of this heightened awareness and legislation has the potential to greatly impact small businesses by then shutting off working capital to these companies that is now so readily available through such forms of alternative finance. The result for many small business owners: fewer available financing options… and that is just the beginning…

There are some finance companies who believe this type of legislation may never occur, or that this regulation would have little impact on their business. There appear to be more who believe that this regulation needs to be addressed now, as the effects of such regulatory reform and legislation would dramatically impact their individual business, as well as the factoring/ABL industries and small businesses alike. As Adam Smith said, “…by pursuing [our] own interest [we] frequently promote[s] that of the society more effectually…”

The AFA has already identified a lobbying firm in Washington, D.C. to not only create a preemptive effort for the benefit of the factoring and ABL communities but to also increase awareness on how critical our segment of the commercial finance industry is for the U.S. economy as a whole. If you have questions on this potential legislation or to find out what you can do to help, contact the American Factoring Association at (805) 773.0021 or visit their website at www.AmericanFactoring.org.

Wishing us all continued success. The Factor Guru.

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Purchase Order Financing a guest blog by Richard Eitelberg

Nov 21

Posted by admin in Sales and Marketing | No Comments

WHY PURCHASE ORDER FINANCING AND LETTERS OF CREDIT HAVE BECOME SAINTS AMIDST THE EVILS OF “THE GREAT RECESSION”

BY RICHARD EITELBERG, CPA, FOUNDER-PRESIDENT OF HARTSKO FINANCIAL SERVICES, LLC, A SEVEN-YEAR-OLD PURCHASE ORDER FINANCE FIRM WHICH HANDLES ABOUT $150M IN ANNUAL TRANSACTIONS, BASED IN BAYSIDE, NEW YORK (WWW.HARTSKO.COM)

e9dc31192f4c8656“The Great Recession” has left a lot of asset-based lenders and factors weak and lame.  Their inability during this period to access credit lines from banks, hedge funds, and equity investors often means they must restrict money to existing customers or refuse prospective clients.

Purchase Order Financing and Letters Of Credit generally looked upon as a last-resort bitter pill have seen increased acceptance as a way for a business owner to preserve a transaction opportunity.  With up front honesty, PF is expensive because of the very high risk issues involved and the intensive servicing requirements.  However, if a deal has the potential to yield a 30% profit or more—why should the business owner be concerned about sacrificing a few more percentage points over and above a traditional lender?  Is losing the opportunity to do the deal altogether, a better alternative?

Factors and asset-based lenders should realize that if they are at the end of their line with their client, referring the PF route can keep their relationship and income opportunity alive.  PF is a fast way for their client to secure funds needed to fulfill customer purchase orders and expand their business without giving up equity or trying to borrow additional funds (an option which no longer exists).

Here’s the process:

1.   The customer submits a purchase order to the client with all documents

2.   The client submits the customer purchase order to the PO financier for approval with all costs associated with transactions

3.   The PO financier will then will make direct payments to the client’s vendors so that the merchandise for the customer PO can be produced

4.   The client’s vendors deliver final product directly to the end customer or to a third party warehouse until shipped to end customer

5.   The seller then invoices the shipment and sends invoice and corresponding copy of customer PO to the factor

6.   The factor funds the invoice at his discount, paying the PO financier their loan plus fee

7.   The factor (or bank) collects from the end customer and pays the client their residual left from the advance

PF is taking a piece of equity in a client’s deal on a temporary basis, perhaps, thirty, sixty, ninety days, or 120 days.  A PF firm earns a fee on a precise part of the deal.  The PF firm doesn’t really “lend” a business money.  Most times, PF firms do not actually give a business any money or hard cash.  The PF firm’s money and equity backs up and supports the integrity of said purchase order.  It makes transactions work by opening up an LC usually overseas to procure merchandise, products, and materials for businesses.  (Or, wires are sent to domestic manufacturers to make purchases in behalf of businesses.)

PF is only transactional and temporary with the money going to fund the goods or merchandise in that specific transaction.  PF funds are not allocated to fund payroll, rents, cars, or any other business operations. Therefore, PF enables start-up companies to grow and troubled companies to survive.  Even bankrupt companies are generally able to access PF because the fees are guaranteed by the court.

Finally, in terms of the relationship, PF firms are not offended that a business owner may use this process one day, while returning to the factor or traditional lender the next day.  The PF community recognizes that PF is only going to be used when it is absolutely necessary and all other lender options have been exhausted.  The PF firm accepts that business owners and their lenders will only use it when they need it!

For more information on purchase order financing, feel free to visit www.Hartsko.com, or contact the IFA directly.

More about the author.

IMG_1009Richard Eitelberg is the Founder, President of Hartsko Financial Services, LLC., with offices in Bayside, New York and Deerfield, Illinois.  Mr. Eitelberg, was graduated from Michigan State University with a BA in Accounting.  He earned his license in certified public accounting (New York State).

Mr. Eitelberg has been the Chief Financial Officer for two garment industry companies: Adrian Landau Designs, and B. Lucid.  He was a Senior Auditor for Josephson, Luxemborg & Kantz, CPA’s, PC. He began Hartsko about seven years ago, assembling a group of private equity investors.  Today, Hartsko handles purchase order financing and letters of credit with some $150m in annual outstandings. (www.hartsko.com)

Mr. Eitelberg, a resident of Plainview, New York is a member of the Commercial Finance Association, the International Factoring Association (preferred vendor) and the Turnaround Management Association.

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Financial Reporting… a telling story…

Oct 13

Posted by Gen Merritt in Operations | No Comments

Ever wonder if you really need to look at financial statements on your clients? Yes, most factors will review the balance sheet and income statements initially, during their due diligence. Most even include financial reporting in their factoring agreements with their clients. Maybe not every factoring company chooses to do this, however, based upon their business model. Some factors focus on small, niche factoring or more collateral-based, hard verification transactions. They may determine that for smaller deals, receiving and reviewing this information is not as important during the initial underwriting process. But, here is the question, assuming you don’t have this type of business model, what about after the deal is funded?

Depending on who you talk to, you may get a different answer… only on those clients that have facilities or fundings over $100,000, over $1,000,000 or more (again, depending on who you ask) or to getting financials on every client either monthly, quarterly or annually. For those that do have certain policies in place, here is my real question: what do you do with them?

Hopefully, this is not just information that is glanced at and put in the client’s file. But, as I have been frequently asked, “What does it matter? Don’t we just need to look if they’re making or losing money?” There is no quick explanation to this question… but the answer itself is easy: No.

For one, many companies today are losing money. Secondly, if you only evaluate financial performance once, you have no trend of data for which to compare the company’s performance. Finally, it is important to compare the client’s data to your data, as the factor. What does this mean? We’ll get there… this article is not about how to read financials, but I did want to take a moment to identify the relevance from reviewing and trending all of this information. Please understand that for most of your clients, it will actually feel like you are just reviewing data and then putting the financials in the client’s file. That’s okay. For many of your client files, this is just a good check to keep you informed of what is occurring in your client’s business.

After all, factors generally evaluate their receivables weekly, review trends monthly, if not more, perform verification and collection calls and other protocols to prevent and manage risk. But, sometimes exceptions occur or complacency arises. Or, for those new to factoring and/or lending, maybe you are not familiar with all the procedures that you may want to have or should have in place for better monitoring accounts receivable and your client’s performance.

So, here is why financial monitoring can be invaluable and the event that sparked this blog.  A friend of mine called the other day to just take a ‘look’ at a company’s financials and to help explain some things to look for when they reviewed the information. We started with using the company’s prior year performance along with their interim financials (balance sheet/income statements). Now, let’s take a look at the summary information: Sales, Margins, Operating Costs and their percentages of Sales. An example is provided below, which is completely arbitrary but gets the point across (I think).

Income Statement

FYE 2008

9/30/09 Interim

Revenues

25,000,000

14,000,000

Avg. Mo. Revenues

2,083,333

1,555,556

Gross Profit

7,500,000

3,000,000

Gross Profit %

30.00%

21.43%

Operating Expenses %

24.00%

25.00%

Net Income after Taxes

1,500,000

-500,000

What can be gleaned from this? The company’s sales have decreased, their margins are down and their operating expenses have pretty much stayed the same… one may want to ask what is going on? Did they lose a big customer? Is there a quality issue? Are their vendors charging them more? Why hasn’t the company also lowered their overhead expenses in relation to their declining revenues? Is the company seasonal? Some would just tell you, “It’s the economy stupid.” These are just some questions for which you may want to find out more, if you don’t already know the answers.

Now, let’s look at the factoring data. During those same periods, this factor had purchased $24mm during 2008 and $17mm through 9/30/09. (And, remember these numbers are not real but exaggerated for illustrative purposes only).

But, wait! Is that right? How could purchased invoices in 2009 exceed the company’s sales?

And, there it is… that ‘light bulb’ moment… need I continue… do I really need to write out what this means…

And, before you say anything, yes, there should have been other signs in the collateral, and yet, sometimes each one of those concerns could have been reasoned away, as they probably occurred gradually, in single occurrences, over time.

Moving on… you may also want to look at certain balance sheet information such as the Accounts Receivable balances. Does their A/R balance correspond to yours for that same time period? In the example above, probably not…

Just think, we haven’t even compared the company’s A/R turnover to the factor’s A/R turnover yet. Can you guess what that information would tell you? Well, to keep this short, we can save that for another time. Just understand that “pre-bill” may be in your future if these numbers are not consistent.

Without over explaining or making this any longer than it already is, I’ll end it here. The point, however, is that checking, reviewing and comparing company financials can be important. It is only an additional tool that factoring companies and lenders rely upon in mitigating risk. But, sometimes these tools can prove to be very telling.

Wishing You Continued Success. The Factor Guru.

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No Horror Stories Here… a guest blog by Darla Auchinachie

Sep 12

Posted by Darla in Sales and Marketing | Comments off

halloweenAs the aisles in the retail stores remind me, Halloween is just around the corner.  I just received an invite to a friend’s annual costume party in Phoenix – this year the theme is Mel Brook’s movies; it will be fun to decide what to wear to that!  To be honest, Halloween isn’t my favorite hallmark holiday – you see my birthday is in October – and throughout my childhood my mother thought it was “cute” to have a witch, ghost, goblin themed or (insert wacky Halloween reference here) themed birthday party for me.  What if I didn’t care for spiders or skeletons?  Well, it just didn’t matter – moms will be moms… enough said. Even though October is generally the “scariest” month of the year with haunted houses and jack-o-lanterns dotting the landscape, I’m in the mood to shine a good light on factoring…

This has been an amazing year so far for factors. I say amazing, but I could probably come up with dozens of adjectives and each would be fitting.  Words like challenging, tough, and busy come to mind too.  This year is different though; I have observed something markedly different than in all my history in this business, which is the huge amount of exposure our industry has enjoyed.  Never before has the word “factoring” appeared so many times in news searches on the internet.  Sometimes the stories are good, you know the ones where factoring is seen as a positive form of finance – other times the stories aren’t so great, like fraud occurring either within a factor’s portfolio or those rogue entities that raise money ostensibly for the purpose of purchasing receivables to only use the funds for anything but factoring.  CIT’s troubles alone have brought factoring into the limelight.  While I truly wish the best for that company and who knows how that will all end up, I suppose I am grateful that more and more of the population has heard of factoring just from reading about CIT in the news.

I have the pleasure of working with multiple factoring companies on a variety of projects – and in so doing have gained a very unique perspective on the state of the industry today – guess what, there are many new deals being booked daily all over the place!  Those factors who have strong underwriting and portfolio management standards as well as their own capital and access to liquidity are finally able to grow their client base simply because other forms of finance are not available.  On the other hand, there are factoring companies who struggle with access to liquidity and declining sales volumes because their client’s sales have decreased.  There are also start up factoring companies opening all over the country as they see factoring as a good business to be in – as long as those folks are seeking out education and assistance and respect established standards, they should be able to do well.  Unless every single factor I’ve been talking to is fibbing, they’ve all been busy putting on new deals – and don’t see their pipeline dwindling any time soon.  Nope, no horror stories here.

A factoring company (just like any other business) wants to make a profit at the end of the day.  This is no easy task when you consider the amount of overhead it takes to run a factoring operation.  Salaries, Credit Expense, Cost of Funds, Rent, Due Diligence Expense, Lock-Box Fees are just a few of the expenditures a factor has.  The smart ones also put a little away each month to build up a loss reserve should the inevitable occur.  To the average person on the street, when they see what a factoring arrangement is priced at, may feel it is exorbitantly high, but when you take away the actual costs to provide this service, you’d be surprised at how little of those fees actually make it to the bottom line.

All that being said – factors have to charge what they charge because factoring is labor intensive and expensive to operate.  If the factor just purchased invoices and advanced funds, they would be out of business very quickly – that translates into fewer companies providing this critical form of finance – not a good thing for the general business environment.   That would be a horror story.

I think that many factoring companies (at least those that I deal with and talk to routinely) are in this business both to make a little profit and because it’s rewarding to help companies survive by providing working capital.  No one I know is in the business of gouging their client base. Moreover, it takes effort to find a client, to perform due diligence confirming the factor can make a difference for that company and then to bring the client on board to provide financing.  We all strive at that point to keep the client active for as long as possible – the average being 18-24 months.  I recently spoke to the head of a factoring company that said they’ve been able to keep their average client to up to 30 months!

Factors actually work hard at the collection process to help keep receivables turning so that the costs of factoring remains as low as possible for their clients.  These aren’t heavy handed collection tactics, merely good old fashioned solid receivables management techniques.  The result is that the client also maintains a healthy bottom line.  Client’s who grow or mature enough to be able to qualify for bank financing make this all a win-win situation.

When I hear of “client horror stories,” I am disheartened by the hyperbole.  I guess I come from the side of the fence that a client horror story is one wherein the client  figured out the perfect fraud and then absconded with big piles o’ cash.    While there is press that suggests that factoring companies are Good, Bad or Evil – these are all emotional terms – working capital shouldn’t be emotional.

If a business needs a factor they can look to any number of resources to find the best arrangement possible.  Price and Structure should not be the only deciding factors (pun intended).  One company may offer a low rate but then require monthly minimums and a term of one year, while the next company may offer a higher rate with an easy out and no minimums.  Some companies even offer programs that adjust with the client’s sales volume.  If you spend the time to understand the differences, you’ll probably find that in the end most offers are relatively equal in costs (plus or minus some basis points).  So if all terms are equal, what can a business seeking a funding source do?

The answer: get to know the factoring company. Ask for client references, and then… actually call them.  Does the factor have a history of taking care of their clients?  How long does the average client stay with the factor?  Is it only three months?  Or is it two years?  What other services does the factor provide? Same day funding on schedules received by noon or does funding take 48 hours or more (routine funding not the initial funding)?  Does the factor understand your business?  How well do you relate/communicate with representatives of the factoring company?  Is the company secure – do you think they will be there when you need them?  Are they in the same time zone as you, and if not does it make a difference (to some it might – to others it won’t).  Are you working directly with a funding source or through a broker?  How do you know the broker is really looking at the best deal for you?  There are so many other issues besides price alone!  If sales volumes can be maintained, maybe the smaller fee with minimums is the way to go. If not, then the higher priced deal may look more attractive.

If I go back to how I started this article, I was shopping… so, look at it this way, when you buy a plain white shirt from a low cost retailer, you probably don’t expect for the shirt to last very long – seams unravel, it gets stretched out, etc…  Buying a similar shirt from a more expensive retailer probably means the shirt will cost more, but the stitching will be different and the fabric might be stronger, and generally speaking, that shirt ought to be in your wardrobe for much longer than the less expensive one.  Which do you buy?  That’s a personal decision. For me, I’d spend extra just to know I would have something of quality… something that would last.

One more thing, you know that factor that quotes a lower rate but then imposes minimum volumes – well, I’ll be willing to bet that can be negotiated.  The negotiation however probably won’t be that the factor will maintain the same low rate without minimums – they simply can’t afford to do business this way.  In order for any transaction to work, it has to benefit all parties – everyone needs to “win.”

It’s a shame when clients don’t fully understand what they’ve signed up for though.  I was taught early on to never sign something that I either didn’t understand or didn’t agree with.  I make it a matter of practice to fully read any document I need to execute and if something isn’t clear to me, then it’s my duty to learn more before signing, and that’s just personally.  Shouldn’t a business owner follow the same rule?  Imagine signing a three year lease and then three months into the lease deciding that you no longer wish to rent the space.  There will be penalties from the landlord to break that lease, why should factoring be any different?

So, I don’t have any horror stories, even though Halloween is near.  Factoring works because those providing the capital know what needs to be done in order to protect that capital, and clients understand that having access to that capital comes with a price. Clients need to look at their business critically to determine if factoring works for them or not.  The business that has very low margins probably shouldn’t factor; the businesses that have some room to absorb the costs of factoring almost always benefit by having the working capital to sustain and grow their operations.  Most factoring companies probably have tons of success stories, and even those that do will have experienced a relationship that did not end well.

I think it’s up to us as an industry to maintain how positive factoring arrangements can be for everyone – not just the factor and not just the client.  This is the business we’ve all chosen to be in and I’m proud to be a member of this community.  I don’t want to dwell on situations that I’m not directly involved in, and I try not to lay blame when the facts aren’t public.  I’d rather shout out that factors are here to serve the businesses that need our funding, and we’ve got the capital to be able to help.

Let’s all take advantage of these current economic times by continually promoting that factoring is a great form of finance!  Lift up our industry for the greater good.

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FAQs: Construction Receivables

Aug 22

Posted by Gen Merritt in Operations | No Comments

2ebf976ad673655aFactoring a construction business can pose additional risks. It is important to understand the billing processes and any potential subcontractor liens that may arise and interfere with payments on factored invoices. The discussion below provides some key items to consider, excluding bonded jobs.

The Underlying Agreement. Clients operating in the construction industry may have and typically do have contracts or master servicing agreements for each job being performed. These contracts typically include the work to be done; assignment language; contact information; billing protocols and requirements for payments; subcontractor payment and lien representations, insurance standards, and more…

Each contract should be reviewed, especially if the Client (for this example, a subcontractor on the job) is working on a longer term project wherein they bill monthly (generally on the 20th to 25th day of the month). Although the work has been performed for that month, the entire project has not been completed. So, yes, this would be progressive billing.

Hint: Jobs should be monitored individually, when possible, to follow when the job is completed and that the Client doesn’t invoice more than the contract amount without getting that overage approved in a change order, or in writing.  Especially when amounts billed are greater than the contract amount, change orders should exist. Additional billings that arise due to “verbal” change orders or agreements generally also come with payment problems attached.

Payment Requirements. Contracts may also dictate how the Client should bill invoices and may even include exhibits of specific forms to use for such billing (i.e., AIA forms for Certificate of Payments and Schedule of Values, etc). With these invoices, the Client may need to supply their customer (the Debtor) a release/lien waiver affirming that all subcontractors used on the project (hired by the Client to do work for them) have been paid.

Subcontractor Payments. Because of how the construction industry operates, another element to consider is where the Client stands in the payment chain; how far are they removed from the ultimate payor (the owner). And, how many other subcontractors have they (the Client) hired to do work for them?  Why does this matter? These subcontractors have rights to monies owed… their rights can supersede that of a factor or lender. They are not the same as suppliers on a manufacturing company’s payables listing.  Don’t think that just because you are funding a subcontractor that you are immune to these issues. Knowing that these subcontractors hired by your Client have been paid may be critical in the collection of receivables.

What happens if one of these subcontractors has not been paid? If a general contractor (the Debtor) hires the Client for a $100,000 contract to provide landscaping work and that Client then orders $20,000 of sod to be delivered to the job site, that sod supplier needs to be paid.  If the Client does not pay the supplier, the supplier may have the right to lien that job thereby affecting payments on that job from the Debtor to the Client.

This means that when the Debtor goes to pay the invoice, they may not do so right away, as they probably would have received a notice of the lien being or to be filed. So, first, that payment is at minimum going to be delayed. Secondly, the Debtor will more than likely make a payment of $20,000 to the supplier and then pay the rest of the monies to the Client (or the factor, as applicable).

This doesn’t sound too bad if the factoring company only has a 65% advance rate. However, what if the amounts owed to the subcontractor/supplier were 40% (or $40,000) and what if the factor had advanced 80% (or $80,000) to the Client. The factor would have advanced $80,000 to the Client and would only receive $60,000 back from the Debtor.

Know the Law. Each state is different but all tend to operate much the same in that if companies have performed work (labor) or delivered materials to or hauled materials from a job site, those companies are to be paid. There are various notice periods for filing liens and requirements to adhere to during this process. You can usually research your state’s lien and bond laws online, or contact your legal counsel for clarification. These differences will dictate notice periods and eligibility. They will also highlight your risks should you be factoring a Client in this industry.

As an example, a fourth tier sub may not have the right to lien a job whereas a second or third sub tier would.  In Texas, certain oilfield services industries may have up to 180 days to file a lien if payment has not occurred, whereas others may only have anywhere up to 90 days, depending on the type of job and where the Client stands in the payment chain. Again, each state may be different.

I know I can go on forever about liens, subcontractors and other nuances and examples within the construction industry… but this is a blog… not a book.

So, to wrap up, I’ll just list a few other items to watch for when factoring construction receivables:

Retainage: this is typically an amount held back (generally 5% to 10%) from each billing until the job has been completed. I mean the entire job… not just your Client’s portion. These amounts tend to take longer to pay or may not be paid depending on if other parties are owed monies, or if additional charges or fees need to be assessed. In some cases where subcontractors have not been paid during the job, these funds will be used to pay for those outstanding amounts. Because of this, many factors or lenders will not allow these invoices to be eligible for purchase.

Mobilization: billings for work ‘to be done’ on a project when no work has actually been done (yet). The Client may bill Mobilization to ‘mobilize’ their crews, purchase supplies, etc. If the factor advances on this type of invoice, it is important to understand that no work has actually been performed, some would argue this is much like purchase order financing. Look at the contract or call the Debtor to see if they will pay for such invoices in the event the project is put on hold or the work never starts.

Until the next time. Wishing You Success. The Factor Guru.

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Understanding the Billing

Aug 1

Posted by Gen Merritt in Operations, Sales and Marketing | No Comments

invoice-imageSince posting the FAQs: Transportation Qualification, I have received other industry specific questions, all of which seem to relate to understanding the paper being purchased. This got me thinking about the primary focus areas when reviewing invoices and their backup. Here are some questions you may want to ask yourself when looking at your documentation… or when discussing transactions with prospective clients…

How is the sale requested from the debtor?

In any industry, each party typically can evidence the ‘sale’ that generates an account receivable or invoice. Generally, a customer (Debtor) will ask the Prospect (Client) to perform a service or provide goods. This request can be in several formats such as verbally, a contract, work order, services agreement, purchase order, etc. This underlying agreement, when available (and yes, it’s available and does exist), dictates the terms of the sale. Pay special attention to those documents that refer to another agreement, the other side of the purchase order, or a website to print their underlying terms and conditions. You may find this information ‘enlightening’ when you are contemplating purchasing invoices and understanding the true sale arrangement.

How is the sale completed?

Once the service has been completed or the goods have been delivered, the Client can usually show that they did provide this service or deliver these goods. This can be in the form of a timesheet, delivery ticket, bill of lading, third party delivery, etc. There should be a way to show the completion of the sale, such as a sign off of the work completed, delivery documentation, etc…

When does a company invoice?invoices

It is at this point that an invoice is usually created and sent to the Debtor. Remember, the invoice is not what dictates the terms and conditions of a sale. It is a reminder of payment for the services or goods delivered. Understand too that just because the Client prints the invoice off their system does not mean a completed sale has occurred or that the customer will pay. For example, a Client may invoice when an order is shipped; however, the goods may need to be inspected (as per those terms and conditions you found on their website) before payment can occur.

What do I ask for then?

Many times, it is easier to ask the Client how they do their billing. What do they receive letting them know their customer wants to order something or have something done? What do they get when it is completed? What does their customer require for payment? Sometimes, it is better to ask these open ended questions to gain a better understanding of the Client’s overall billing process. For example, if you just ask for the purchase order, it may not include the original underlying contract that exists.

Many factors will request a sample of the Client’s billing during the due diligence phase. Often times, Clients tend to provide a sample that doesn’t match as they are just pulling the closest information they can find on their desk (meaning, you may receive a work order for one sale, an invoice for another and a delivery ticket for another). However, it is important to be able to review an entire sale from beginning to end. Try to have the Client provide you with an invoice and all the backup relating to that ONE entire sale or order.

Once you have a basic understanding of their sales process, new questions may arise as you review this paperwork. Understanding that paperwork is critical, so ask the Client whenever in doubt or whenever something is not clear… it is better to know before you fund an invoice than when you are trying to collect on that invoice.

It is also important to remember that each industry is different and may have various types of documentation specific to their industry. But, we’ll leave that discussion for another day…

Wishing You Continued Success. The Factor Guru.

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Factoring and Gambling: Part II

Jul 17

Posted by Gen Merritt in General Information | 1 Comment

820928dbf1b9db54 As a follow up to the Part I weblog from May, here are some other pokerisms (if that is even a word – probably not) that may be useful in your journey as  a factor… or they may just be entertaining. Either works.

* Don’t be a “fish,” otherwise defined as a bad poker player. These fish never truly understand how to play the game; they just keep playing. In  factoring, if you fund enough bad deals or make too many exceptions to the rules that result in losses, you will eventually lose… you may even lose your  business. Good factors know the rules of the game, develop them, and execute them every day. If you are not sure where to seek assistance on the rules,  attend an IFA seminar or call the IFA, an industry consultant or even a friendly competitor for help.

* Don’t throw good money after bad… sometimes, when you have a problem account, you may believe you need to continue providing working capital to the company so they stay in business. After all, if you are short on collateral, how else will you get your money back? This decision is not to be taken lightly. You cannot hope your way out of a deal that has gone bad, as they say.

Do your homework. What is really going on in the client’s business? How can it be corrected? Take your time to identify your exposure and other repayment or collateral options. Understand the inter-workings and financials of the business itself. Will putting more money into the pot really help get your money back?

* Learn from your mistakes… it happens. We can all become complacent in our monitoring protocols with long time clients. We make exceptions to get deals done quickly, or we believe we have covered all of our bases (i.e., seen all the options on the river) during our due diligence… only to find we missed something extremely important (or misread our cards).

However, we can only get better if we actually learn from those mistakes. Go through your history of losses. Make a list and refer back to it. What were the reasons those losses occurred? What were the exceptions, if any, you made to get the deal done? What were the common characteristics between the various transactions? What have you learned from looking at this list?

* What’s that song? “…Know when to fold ‘em. Know when to walk away. Know when to run…“

Did you see the July weblog “Understanding the Story… What If,” a guest blog by Darla Auchinachie? Once in awhile, there is a voice tapping you on the shoulder saying, “Um, perhaps it’s time to leave.” And, sometimes when you listen to this voice, you live to play another day.

* One bad call in judgment can destroy ten good calls. How many deals does it take to make up for a loss on one bad deal? Do the math…

* At some point, you will lose. You really can’t win them all. Some elements are out of your control. Structuring deals appropriately up front will however help mitigate losses significantly. Ask yourself on every transaction you review, “Can I get out tomorrow?” If not, why not? What can be done differently should you need to collect out of the deal?

* Being aggressive can be a good thing. When a deal goes awry, it is better to act and act quickly. In factoring, the entire client receivable base can turn over in 45 days. The longer you wait, the further you may be from your collateral. And, don’t forget that the longer an invoice stays open, the harder it is to collect.

Good luck. Wishing You Success in the Game. The Factor Guru.

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