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.