The Factor Guru

Tips on accounts receivable financing and business practices.

Clients’ Failure to Pay State Franchise Taxes is Risky Business for Factors! A guest blog by Scot Pierce

Jun 15

Posted by admin in Uncategorized | Comments off

Factors need to be aware whether their clients are in good standing with the states where the clients conduct business.  Most entities doing business in a particular state are required to pay state franchise taxes.  Paying the taxes helps maintain an entity’s legal standing to do business in the state.  Failure to pay, however, ultimately leads to tax forfeitures which can be a big problem for factors.

Tax forfeitures affect an entity’s liability protection.  You are all familiar with the various entity forms.  You know that some entity forms provide limited liability for owners, shareholders and partners.  These include limited liability companies, S corporations, C corporations, limited liability partnerships, and professions corporations.  You also know that sole proprietorships, general partnerships, joint ventures and DBAs have no limit on liability.  Entities can lose their liability protection by failing to pay state franchise taxes.

Using Texas as an example, entities have three levels of standing.  They are (1) “Good Standing,” (2) “Not in Good Standing,” (3) and ‘Temporary Good Standing.”  Most states have the same or similar designations.  “Good Standing” means the entity has filed all franchise tax reports and paid its franchise taxes in full.  This allows the entity to continue doing business in the state.  “Temporary Good Standing” is really no reflection on the entity itself.  This simply means that the state has not yet processed the franchise tax reports. Until it does, all entities are granted temporary good standing.

“Not in Good Standing,” however, is very different. “Not in Good Standing” is a red flag for factors.  It means that the entity has not paid its state franchise taxes and has, therefore, forfeited its right to do business in Texas.  In practical terms, this means the entity is now operating as an assumed name or DBA so any shareholders, owners or partners are not protected personally from liability for debts incurred while the entity was “Not in Good Standing.”  Or, to be more direct, you are now factoring a sole proprietorship or general partnership.  My experience is that this not only can affect how you factor the client and perfect your security interest, but it is also a red flag that you may very well be factoring into a liquidation.

Because of the effect of failure to pay state franchise taxes, I recommend factors be vigilant in checking this.  Usually, the state comptroller’s office will have this information.  If you have a client whose account status changes for the worse, you should immediately contact the client to learn why this has happened and whether the client intends to correct the problem.  This may allow you to catch a failing business early on and take appropriate steps to protect yourself. Or, it may allow you to avoid factoring a business that just wants your money while intending to file for bankruptcy protection. The bottom line is factoring a client who is not paying its state franchise taxes can be a recipe for disaster.

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, including an upcoming teleconference on Issues to Consider when Litigating against Account Debtors.  He can be reached at 817/339-2474 or spierce@belaw.com.

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Attorney Locator Service: a must have for factoring

May 11

Posted by Gen Merritt in General Information | No Comments

I realize this may come across as an advertisement… and yet I am going to say ‘however…’

This new service by the International Factoring Association where they announced the launch of an Attorney Locator Service is great. Do you realize the number of factoring companies that have clients in other states and markets? When a problem or concern arises in these other states, having an attorney that understands those state laws can be invaluable.

For example, I have had that fated call from a factor where they needed a local attorney (in that market)… they needed them to help but to also understand factoring. They called someone from the Internet. In fact, this one factor I spoke with spent several thousand dollars on the education process for the attorneys, only to find out the attorney they were using learned ‘a little too late.’ The attorney’s initial complaints did not address the proper arguments; they actually approached the suit as a ‘consumer’ suit… their reasoning had little to do with factoring or the sale of a receivable… let alone payment over notification. After all the legal fees and ‘education,’ the factoring company actually dropped the suit due to the legal fees (costs versus reward). A “pre-screened” attorney, endorsed by another factoring company, could have saved them money… and resolved their lawsuit.  I wish this service had been around several years ago.

Although it seems basic, factoring does require a special niche in the legal realm. Those attorneys who have experience in this segment of commercial finance can help, where others may spend your dollars educating themselves on our industry: factoring.

So, today, this new service through the IFA is designed to match factoring companies, asset based lenders and other receivables finance companies with the right attorney for their needs.  This free service can be accessed on the IFA’s website at Attorney Locator Service link and by selecting attorneys in the vendor category listing.  The IFA’s Attorney Locator Service is searchable by geography and practice area and provides a simple, reliable way to find a law firm which has been “pre-screened” by a peer.  Attorney specialty practice areas which are searchable include Bankruptcy, Collection/Litigation, Article 9, Contract Law, General Business, Litigation, Tax Law and Factoring.

Since these attorneys have been “pre-screened,” it makes it more efficient and more reliable for identifying an attorney who can help when the time comes… and it will.  So, yes, this seems like an advertisement… but it somewhat is. I do endorse it and wanted to be sure to share this link, as it adds value to us all.

Wishing you success. The Factor Guru.

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Who is Hammurabi: A Brief History of Factoring

May 5

Posted by Gen Merritt in General Information | No Comments

If you attended the April 2010 IFA Annual Factoring Conference, you may have dropped in on Factoring Jeopardy, where you were sure to see that certain categories did not fare so well for those participating in the game. For me, that category was of all things: History.

Yes, factoring does go back over 4,000 years to the Mesopotamian King Hammurabi. He was the ruler who established the world’s first metropolis, Babylon, considered the bed of civilization. The Mesopotamians are accredited with being the first to implement notes/borrowings on clay tablets between two parties. These clay ‘contracts’ indicated promises to pay; they were promises for future payments. This concept expanded trade and increased economic power for that time, setting a foundation for certain alternative forms of finance today.

Since then, factoring has evolved becoming a critical financial tool for doing business in almost every civilization that followed, the Romans included, who were the first to sell discounted promissory notes. The first documented form of factoring in the American colonies, however, was prior to the revolution.

Merchant bankers in Europe gave the American colonists advances for materials, allowing the colonists the ability to harvest their lands. Raw materials like cotton, furs, tobacco and timber were shipped from the colonies to Europe. Factors during these colonial times advanced against the accounts receivable of these companies. This practice became very beneficial to the colonists, as they didn’t have to wait for the money to begin their harvesting again.

Later, during the economic revolution, factoring became more concentrated on the issue of credit, as factors began assuring payment for certain clients (today known more as non-recourse factoring). Before expanding to varied business types after the war, factoring specifically catered to the textile and garment industries in the United States.

By the 1960s and 1970s, an escalation of interest rates and tighter credit spawned a new interest in the factoring market, with a number of private factoring companies coming into existence. By the 1980s, further rate increases combined with new regulations within the banking industry caused many small businesses to seek alternative sources of funding outside of traditional banking. It was at this time, factoring became a more popular option for many of these companies.

As many of you know, factors make funds available even where banks cannot often do so; typically, factoring companies focus on the creditworthiness of the customer (debtor). In contrast, the fundamental emphasis in a bank lending relationship is on the creditworthiness of the company itself, not that of its customers.

Factoring is a financial transaction wherein a company sells its invoices/accounts receivable to a factor at a discount. In exchange for this, the company receives immediate working capital. Three parties are involved in the transaction: the factor, the company seeking financing and their customer (the account debtor). The sale of the accounts receivable transfers ownership of those invoices to the factor, at which time the factor obtains the right to receive the payments made by the customers.

Today’s factoring still focuses on advancing funds to small to mid-size, rapidly growing companies who sell to larger, creditworthy customers. Factoring is among one of the most effective and efficient forms of financing utilized by businesses. It immediately improves the cash flow of a business.

In addition, today’s factor offers other support services for their clients including providing credit checks on new and existing customers, sending monthly statements to customers for payment, performing collection calls, processing and maintaining history on invoices and customer payments, and providing reporting for this information, typically with online access for the client. Some factors even provide additional financing services for their client companies.

After all of that, the only history question from Factoring Jeopardy that this actually addressed and answered: Who is Hammurabi? I no longer remember the other questions… maybe some of you do and want to comment…

Wishing you success. The Factor Guru.

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Banks and Equity Funds Starting to Look Again for Accelerated Returns, a guest blog by Neville Grusd, C.P.A.

Mar 18

Posted by Danny Frank in General Information | No Comments

It is widely acknowledged that the past eighteen months have been one of the most challenging “survival of the fittest” periods in modern history, for factors.  Yes, our economy and specifically the commercial finance sector are now budding a few small signs of stability with dashes of optimism.  (We are a long way from seeing the frenzy of liberal capital and loose credit which characterized our industry less than five years ago.)

The hibernation of hedge funds, private equity interests and investors is ending as they become hungry for stronger returns.  However, coming from a strategy where this community pretty much shut down their money flow altogether—they now want very high returns in exchange for cash and credit lines.

Meanwhile, commercial banks have turned off their lending spigots for small business because of the volatile credit conditions, and the aggressive enforcement oversight by government regulators who prohibit these lenders from any perceived questionable transactions.

At this time, the credit line needs of factors should be one of the best income-earning risks which banks can entertain.  Unfortunately, many bankers have a mind-set:  They do not lend to finance companies.

When their questions and concerns about this issue are examined, their reasons are often distorted and lacking in fact.  Many commercial bankers ask:  “Why should our bank give a credit line to a finance company, when we would not make the small business loans being made by the finance company, ourselves?”  They argue that the loans often made by the finance company are to “unbankable” business entities.  These companies are not strong enough, not old enough, with a problematic track record and worse.

We are not lending solely on historical balance sheets.  We are lending mainly based upon collateral which we manage on a daily basis (while most banks only look at financial statements on an annual basis). We also look at a company’s future business based on their orders in the pipeline.

Commercial banks and factors need to find common ground to reach prosperity together.  When driving a car, do you spend most of your attention looking in the rear view mirror, looking at where you have been?  Or, do you stay focused on the windshield and watch where you are going as you move forward?

If those “unbankable” small businesses have valued collateral, which we as factors and asset-based lenders can control—we are able to provide them money to help these businesses grow.

The lending marketplace has room for both the commercial bank along with factors and asset-based lenders.  If a business owner has a strong balance sheet, they are going to seek out a bank because it is cheaper and less work to submit occasional financial statements.  If a business owner is undercapitalized yet their company offers a lot of potential, and they want to take advantage of every opportunity which comes along—asset-based lending and factoring is very appropriate.

So long as banks conduct their usual due diligence, they will find that extending credit lines to finance companies is a good quality risk, many times better than their regular lending standards.  Most times these loans are diversified, spread out, over different industries, different geographic areas, different customers, different payment schedules, so the finance company is not dependent on any one particular loan, the risk is much less than they would find in one regular business.

Furthermore, the people running these finance companies are often very experienced, very professional in the depth and knowledge of the industries they are financing.  They are executives the banks can “talk to” as opposed to many businesses where an owner’s lack of understanding breeds a strained, perhaps, negative relationship.

Another silver lining, for banks giving credit lines to factors and asset-based lenders, is the potential of a finance company to provide mutual referrals.  As a business becomes more stable where it progresses into a more attractive prospect for a traditional bank, now the factor or asset-based lender is in an advantageous position to hand off their client to a bank of its choice.  There will be strong influence in that decision by the finance company which has helped the business owner.

There are only a small handful of banks which have recognized the vista of lending to finance companies. They have benefited from these relationships for many years.

About the Author:

BY NEVILLE GRUSD, C.P.A., EXECUTIVE VICE PRESIDENT, MERCHANT FACTORS CORPORATION (WWW.MERCHANTFACTORS.COM) WITH OFFICES IN NEW YORK CITY AND LOS ANGELES.  MR. GRUSD IS A DIRECTOR AND ACTIVE MEMBER OF THE EXECUTIVE COMMITTEE OF THE COMMERCIAL FINANCE ASSOCIATION (CFA).  HE IS A MEMBER OF THE EDITORIAL BOARD FOR THE C.P.A. JOURNAL, THE OFFICIAL PUBLICATION OF THE NEW YORK STATE SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS.

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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 | Comments off

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 | No Comments

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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