The Factor Guru

Tips on accounts receivable financing and business practices.

Archive for September, 2008

A Bumpy Ride: Plan Accordingly, Hold on Tight

Sep 29

Posted by Gen Merritt in Economy, General Information | No Comments

Okay… so only those of you who know this person will understand, “Are you kidding me?” Yes, that is what I said. The events of the past few weeks seem utterly surreal. Before you can process what just happened, another headline appears on your computer’s home screen. It’s all anyone talks about… the wild ride on Wall Street… and, it is downright scary when you think about it all. So, get ready…

Let’s recap on a few of these events since the Fannie Mae and Freddie Mac debacles roughly two months ago, although that wasn’t really the beginning was it? (More of an aftershock from deeper rooted decisions).

Bear Stearns, Lehman Brothers Holdings bankruptcy, Merrill Lynch, and the government takeover of American International Group, Inc. followed — we thought that was shocking at the time, now,

JP Morgan Chase bailed out the largest bank failure in U.S. history with Washington Mutual even after the $700 billion bailout was rejected by the House,

Wachovia Corporation was sold overnight to Citigroup Inc after a roughly $200 million win in their competitive bid against Wells Fargo,

Yesterday, the stock market fell over 400 points in less than five minutes; quotes from this day included “worst decline since 1987” and “the sum of all fears,”

There are now only four national banks (Citigroup Inc., Bank of America, JP Morgan Chase, and Wells Fargo… or would that be six with the other two changing their charters last week).

And, it’s not over yet…

The auto industry just received a $25 billion bailout of their own,

The government is still pumping in billions of dollars into the financial system and housing market, 

Congress has been in the midst of marathon sessions.

And, let’s not gloss over the other sideline headlines, further evidence that the buck didn’t stop there.

National City stock plunged yesterday and was downgraded begging questions relating to their future (…not going to go there but I will note their stock was trading less than Wachovia Corporation at the close of business). There are many others lingering in the sidelines; just a matter of time (or days as the events of the last few weeks have shown). Some experts anticipate up to another 1,000 bank failures over the next six months. Not all of these can be ‘rescued’ by the Fed. And, we haven’t even touched on the global market effects. 

Someone asked me yesterday, “What does all of this mean?” Honestly, how do you even keep track, or explain the fact that it would be like cutting everyone’s credit cards in half… all at once. And, that assumes they have jobs and will still have an income. Unemployment is expected to be over seven percent by 2009, the highest it’s been since the 1990-1991 recession.  The Secured Lender referenced an article that equated this ‘crisis’ to “depriving a body of oxygen.”

Of the banks left, there are some that are now implementing floors on pricing and even escalating pricing on already sent proposal letters for new commercial loan transactions, including for asset based lending deals. I guess this is better than the alternative… dare I say it… not making loans.

Even in this market, that may seem like a drastic measure, until you take a deeper look. One reason may be that LIBOR jumped to over three percent and may still rise; Prime may drop below this. Can you imagine? 

Stop — think about what I just said. Doesn’t that mean that some companies with low interest commercial loans would actually pay less than some banks or financial groups pay for their money? It is a Mad, Mad, Mad, Mad World (as Mark Sunshine’s First Capital blog noted).  

And, for factors, it will not be any easier. Yes, factoring companies may see a rise in business and in new fundings during this time period. But, what’s underneath? Take a careful look: What is in your existing portfolio… your existing client base? Can your portfolio handle the ride? 

Bailout, no bailout, we all have differing and apparently passionate opinions on this matter. However, we will all be affected. Who’s to blame, who should be held accountable, who comes out ahead, who suffers the most, who should correct it, and who should pay… the list of questions continues. At the end of the day, no one knows for sure. I just wanted to highlight what we should already know. It will be a long road until we get there. We will make mistakes. We will have to live with them. It will be slow. It will be painful. And, hopefully, the market will correct itself over time. Until then, stay the course, plan accordingly and hold on tight. Because, those headlines are right: We are all in for a bumpy ride.

 

 

 

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Payment Application: Does it matter?

Sep 27

Posted by Gen Merritt in Collections, General Information, Operations | No Comments

Well, I am still new to this blogging concept… this week we did have some other topics on risk prevention, not just risk management. In some cases, this may not be the new deals you are looking at, but rather, those already on your books. The common theme among some of the questions: payment application on invoices. And, you ask, why does this even matter?

When invoices are funded from a schedule that has been submitted, several implications may be made. First, the factor is maintaining their books, the receivables, to monitor those invoices. Second, the company selling the invoices may rely on the factor (depending if the factor offers these services and if the company selling the invoices desires these services) to enter the invoices, call and collect on the invoices, and track payments accordingly. Overall, payment application should be a simple concept: When a payment comes in on an invoice that has been factored, the payment should be applied to that invoice.

Sometimes, however, companies will call and request that a factor use payments that come into a lockbox to close out other, older invoices in an effort to reduce accruing fees or for other reasons, even when such payment request would mean applying collections from one customer to another customer’s invoice(s), applying collections for one invoice to other invoices, etc. In other cases, no check remittance may be available and instructions for how to apply such funds are directed by the company (not the customer writing the check). And, although rare, potential frauds can grow over time should misapplied payment practices be in effect.

Logically, reducing fees makes sense if that is the reasoning behind such request. The majority of the time, however, other underlying factors exist. Applying payments to the wrong invoices can cause confusion among the parties involved, may result in invoices appearing to have been paid that in fact have not, or may show skewed account debtor payment history on the factor’s reporting system. More importantly, it may make it harder to reconcile both the company’s and the factor’s records at a later date, should the need arise.

By applying payments to proper invoices, or showing them as non-factored funds if they are truly non-factored, the paper and payment trail can be maintained. Should a company want to use those funds to reduce fees, they may be able to just use the available ‘cash’ reserves to close out invoices. This maintains the integrity of the payment history for all parties involved, including the account debtor (the company’s customer). This process also allows for collection calls to be placed on aging invoices that may still be open with the company.

So, how do you know if this is a problem? Just do a simple audit. Pull a few months of collections or even a sample of a few customers/debtors (meaning, actual check images/copies) and compare these checks to how those payments were actually applied. Do they match? Were they applied to the right account debtor and the correct invoice(s)?

Now, what do you do if this type of payment practice has already started on a client account? Sometimes, the best rule may just be to correct the problem going forward. And, sometimes, once caught, you may be able to identify a potential risk that may not have been known. You may be able to prevent misapplied payments that had been a cover for fraudulent activities on behalf of a company selling invoices to a factor.  Again, this would be an exception. However, good processes and practices cannot only help a factoring company but also the company selling the invoices. 

Wishing you success… the Factor Guru.

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What is Factoring?

Sep 25

Posted by Gen Merritt in General Information | No Comments

Factoring, accounts receivable financing, invoice financing, discounting – or whatever you want to call it – is a commonly used form of finance that provides immediate working capital to businesses. A factoring company purchases the accounts receivable, or invoices, from a company (the client). This purchase of accounts receivable typically requires the client to have sales to commercial customers (account debtors) who are credit worthy, with terms of sale usually around 30 days and less than 60 days.

Generally, these sales are for completed orders (for goods delivered or services rendered). This includes a variety of industries including, but not limited to, manufacturing, staffing, transportation and logistics, distributing, importing/exporting, medical and healthcare businesses, oil and gas, consulting, IT and technology, services, construction and many others. Some factoring companies will finance progressive or milestone billings, although this tends to be the exception more than the normal course of operation.

Once the invoices have been sold to the factor, the client receives an ‘advance’ of anywhere from 50% to 95% of the invoice, with an average advance rate more likely at 80% to 85%. Advance rates depend on the industry in which the client operates, billing practices of the client, and payment patterns of the account debtors. For example, a client in the construction industry may have offsets for subcontractor payments, retainage, and other industry related offsets. In this case, a lower advance rate may be warranted. On the other hand, staffing and transportation businesses tend to have fewer reasons for non-payment of an invoice, resulting in a higher advance rate being offered.

Assuming an 80% advance rate, the factor would then retain a 20% ‘reserve,’ which would be released back to the client once the account debtor has made payment to the factor (less the factoring or discount fees that have been earned and/or accrued).  Before these payments are made to the factor, this reserve is often called an ‘accrued’ or ‘escrowed’ reserve. Once the payment has been received, however, this reserve becomes a ‘cash’ reserve, assuming full payment of the invoice (or at least the funds advanced plus fees) has been received. Factors may hold cash reserves for other potential invoices that are aging out on the factor’s books, have known disputes, or where other credit criteria may deem holding such cash reserves necessary.

Factoring can be a useful tool to companies seeking capital or needing to increase their working capital cycle. Stay tuned for more details on the inter-workings of factoring and its importance to helping companies manage their cash and their receivables while focusing on the growth of their business.  

For reference, you may want to read Wikipedia, which has a good general overview of factoring including a brief history. About.com also had some other reference information on the benefits of factoring.

Happy reading. The Factor Guru.

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Measuring Results

Sep 23

Posted by Gen Merritt in Collections, General Information, IRS Information, Sales and Marketing | No Comments

Yes, we had several questions this week on payroll tax monitoring, 8821 forms with the IRS and past due taxes, along with IRS tax liens. In all cases, we are happy to provide our experience; however, you should also consult your legal counsel or a CPA to insure you are protected. We’ll save this for another time. If you have questions in the interim, you can email us directly. (A link has been added for this form so you can use this now, if you are not already). Note this was updated in August 2008.

What I wanted to talk about in this entry was planning and measuring performance. Do you have the ability to measure productivity… performance… results? How do you know that the processes you thought you established are truly being followed? What tools and management do you have in place? (This works in any business – not just factoring).

Have you ever wondered why marketing/salespeople bring in a lot of leads but minimal results? Have you ever wondered why a collections staff can call on aging invoices all day but with limited success? Some would say it’s a numbers game in both cases. I respectfully would disagree.

Sales can be a numbers game, but wouldn’t it be better to identify who your salespeople are calling on, what they are saying, what they know about the product they are selling? Is it just the features? Or, do they know what the true benefits (and challenges) are for a prospective client? Can they outline those benefits to a prospective client to add value to any new customer? Can they breakdown a good lead from a ‘not a good fit’ lead?

Likewise, in collections, do your collectors just call to identify the status of a payment without understanding what they are calling on exactly? Do they follow up promptly? Is the reason they are calling because of an internal issue in either your company or your client’s company?

In both cases, you will notice, ‘understanding’ is required and needed to produce efficiency in efforts and to maximize the value of your organization.

Although I have lots of ideas about both — I more or less want to pose the question to readers for them to think about their operation, their company, and ultimately their success.

Wishing you success… the Factor Guru.

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Welcome

Sep 23

Posted by Gen Merritt in General Information | No Comments

Welcome. Isn’t that what your first blog should be? Find out who we are, why we are here, what we want to say, why you should come back. Well… Yes.

As an underwriter, account executive, credit officer and consultant to other factoring companies, I have been in the factoring and asset based lending industry for over 13 years. This is the part where I guess you could say I have been in the industry, have helped run a factoring business, and have experience in all aspects of factoring.

I am doing this now with the help of friends and industry peers to create this blog. We are here because those in the industry want interaction and feedback, because others in the industry want to share information, and because if we cannot help each other, then who can we help? I also do this because I do get calls every week with questions on the business and just thought this would be a resource to share that information. So you know… it will not be 100 percent factoring related. If you know me, I have a tendency to go off on tangents. That will happen on occasion, whether I intend to or not.

Under the introduction of how this Welcome started — why do this? Because I do (if you know me) seem to have a lot to say… not to those who already know everything but to those that don’t or that want to get more information, or just those that want that ‘one good thing’ out of this… to help them do better both personally and professionally in our industry, to those who want to learn more, to those that that believe factoring is their passion – not just their job.

So, why will you come back? That’s easy. It’s a resource that will include articles from across the industry (us, other factors and niche providers). And, I don’t believe in this being an outlet for companies to sell their services or companies. Those that help in providing articles for the blog can give their contact information if you want more answers… but that is all (sorry but this is not for advertising – yet).

Whether you find this blog helpful – or not – we will be here (at least for now). We look forward to being your resource you can use in your work and day to day lives.

Wishing you success… the Factor Guru.