The Factor Guru

Tips on accounts receivable financing and business practices.

Archive for December, 2008

What Happens Tomorrow?

Dec 7

Posted by Gen Merritt in Economy | No Comments

For those avid ABF Journal readers, look for an article soon on “The Perfect Storm,” that stemmed from a recent panel discussion hosted by the Finance Forum. Several analogies arose during this meeting that related to that movie and the current economic credit climate (or credit crunch). Those analogies were symbolic in a certain sense. They illustrated how we got here… where we are today.

During another meeting this week, one of the board members of the Finance Forum, Josh Steele of Euler Hermes, noted another movie, The Day After Tomorrow, which held other similarities. He described it by saying, “In the movie, the ice age is the Earth’s way of cleansing itself. In a way, this [crisis] is a way of getting rid of less stable companies.” The Perfect Storm was about how we got here; however, what happens after the storm? What happens tomorrow?

This credit tsunami, as Greenspan noted, evolved after years of overextending credit. This occurrence also fits within the factoring space with the number of factoring companies aggressively competing in a marketplace where working capital was abundant, where mitigating concerns and overextending credit was not the exception, but a way of doing business. Now, take a look around. The landscape has changed, and tomorrow is a long ways away.

If you recall, after the storm first hit, New York residents and visitors were running, seeking shelter. Respectively, factors have been looking harder at credit and how to better structure deals, yes. Some factors believe that this is all that needs to be done, just a little more structure, just a little more due diligence. All is fine, right?

The factoring world is entering a new era that will probably continue over the next few years. Its presence will unfold even more through 2009. How factors react to this credit crunch may be telling in how and, more importantly, who will come out of this storm intact. Will we all learn from each other’s mistakes?

In The Day After Tomorrow, some people [factors] decided to go outside, venture back out into the streets where they believed everything was safe once again… it was back to normal… or so they thought. But, this was only the beginning. It was then that the landscape changed, even more. The freeze hit. Do not construe this as a credit freeze. Even though it is a credit freeze for many traditional lenders, it is not for many factors… necessarily.

What it is, however, is more due diligence than originally contemplated, more monitoring on existing clients and for client customers (debtors) than was initially planned, and more focus on staying the course through this storm. It’s a time to review and assess our new environment and the players within it. Not all of them have survived; not all of them will survive. The landscape has definitely changed, and it is not over yet.

So, again, as Jason Evans [Dash Mihok] asked in the movie, “What’s going to happen to us?” Jack Hall [Dennis Quaid] replied, “What do you mean?” Jason expanded, “I mean us? Civilization? Everyone?” Well, what do you think the answer was… Jack summed it up with, “Mankind survived the last ice age. We’re certainly capable of surviving this one. The only question is will we be able to learn from our mistakes?”

Wishing you success. The Factor Guru.

 

 

 

 

 

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A Good Deal for Factoring

Dec 2

Posted by Gen Merritt in Underwriting | No Comments

As someone who has specialized in credit and operations, I do have to on occasion empathize with the business development team. Once in awhile, a deal comes along that you know is a good deal. Don’t let me confuse you though. I don’t mean a deal that is a good ‘factoring’ deal… I just mean a good deal. You know the one: the company that is profitable and has strong customers; the owner(s) have good personal history and experience in the business along with great personal credit… oh, and the product has ‘mostly’ been delivered.

Wait, that’s it: “mostly” delivered. That’s the word that factors have a hard time with… mostly.  The fundamentals of factoring rely on delivered products and services performed in full. Nothing remains to be done. The sale is final. The invoice will be paid.

With the word “mostly,” however, the product is not definably delivered, today. Many technology and consulting businesses have services predicated on something else occurring. The services are not yet finished. They may need something else to happen for payment, or they may not. It just depends, right? The invoice, therefore, may at the end of the day still be disputed. So, what do you do?

Well, the best thing would then be to get a confirmation from the customer that the invoice will be paid in full, without offset, without dispute, and, hopefully, the factor is ensuring the payment is going to them pursuant to Article 9 of the Uniform Commercial Code, as outlined under the notification of assignment letter that is sent to the customer (account debtor). If you have never heard of a ‘no offset’ letter or an ‘estoppel’ letter, then call your legal counsel. Check out the International Factoring Association for legal counsel, if you don’t already have someone to prepare one for you.

Now, as a business development person, try telling this to the client. The company may not  understand. They have never had someone not pay; it just hasn’t happened to them. It’s only happened to other people. So, why do ‘you’ need this letter (the factor – the independent third party)?

This type of transaction may have been structured and approved under the ‘we did it before, so why don’t we do it now’ mandate. Remember, however, that was when working capital was at a surplus, when factors and lenders were aggressively competing in the financial marketplace.

So, after you see a deal like this, talk to them, maintain a good relationship with them, get prompt and accurate information from them, it is definitely hard to then say, “No, we cannot do your deal (the way you would ideally like),” or however you approve a transaction with certain requirements that the client ultimately then says no.  

When it is all said and done, sometimes you have to step back and say, “Can I get out of their transaction tomorrow?” That’s my motto, right? So, why is it so hard when you are so close to the client and the owners… just after a few phone calls and an in-person meeting? Well, because the answer to your own question was, “No,” even after all that.

So, once again, that is what I have to remember: honesty and candidacy is the best policy. You have to explain how a deal needs to be structured and also monitored. You have to tell this to the prospective client. You have to further explain and describe why this is the only way you or your company can approve their request. If their request to approve the transaction cannot be done, then it just can’t…or it can’t be done by your company. Maybe they can find financing elsewhere; however, with the current credit environment, I have to say there are slimmer pickings.

At the end of the day, a factoring company has to ask themselves, “Can I get out tomorrow?” They have to have an exit strategy. If the answer that comes back is anything less than a “Yes” then maybe the transaction is not meant for factoring. Sometimes, you really do have to say, “No,” even when you want to say, “Yes.”

Wishing you success, without regrets. The Factor Guru.

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