You’re not supposed to get ‘weepy eyed’ over golf… or, at least I’m not. I finally watched The Greatest Game Ever Played. Do you know what I thought (after crying… which I don’t do so erase it from your memory)? Passion, persistence, and dedication. Those are the words I would use to describe how I feel about factoring, our industry, what we do (as factors) to help others: industry peers and clients alike. You have to believe in what you are doing. Period.
It also brought about something else: help others, acknowledge those that are learning and work to help them succeed. Several people, industry veterans as I would call them, always went above and beyond, out of their way, and more to help me learn more. I was lucky, I guess.
For this weblog posting, a friend of mine and one of my mentors, Darla Auchinachie, a 17-year veteran in the factoring industry and a long time speaker, board member and advisor for the IFA, agreed to write an article. To maintain this trend of helping others in the industry and showing her continued dedication to the industry, she has shared an article with us that rings true… for factors, clients and others. Pay attention. I always did.
This is an open letter to every factoring company executive.
Unless you’ve been stranded on an island the past year, you probably haven’t been able to escape the news concerning the biggest economic crisis to hit since most of us embarked in the career of factoring. As we enter the new year the media claims we just can’t wait to get this behind us. But wait, the factoring community simply can’t go along as business as usual expecting to avoid being impacted by the crisis merely because a new year is upon us.
It’s time to take a serious look in house and be prepared to engage in some strategic planning to take your company through these incredibly challenging times. I spoke to a trusted friend recently, his comments keep ringing through my ears. He says, “Its bananas out here”. Yep, that sums the economic crisis up, especially to the all the factoring companies, bananas just bananas.
The economy is shrinking, but wait it’s the perfect storm for us – banks will get out of our space, we’ll be flooded with opportunities is one point of view. Another says yeah, but credit is our biggest concern right now, and it should be retailers, the auto industry, the oil companies in our account debtor base, the bankruptcies are sure to start stacking up come the first few months of the year. Yet others are concerned for their own liquidity and access to capital.
Bananas, heck we have a whole fruit salad.
I call on every factoring company to consider taking action on a few items which will see them through the murky times ahead. Look, no one knows what’s going to happen; we truly are in un-chartered territory, most fear to make predictions, some believe that we will be on our way to recovery by the end of 2009, and yet others are planning how to best benefit through it all.
How can you benefit when you can’t even be sure which way the economy will turn or how long this recession will last? Well, you can’t control the future but you can be informed and prepared, lest you are blindsided by any number of salvos which will surely come your way.
They are saying that we are entering into a period of economic Darwinism. That is to say, only the strong are going to survive. For example, Wal-Mart will no doubt end up stronger because of the smaller retailers who will fail due to the downturn of the economy. Here are five steps a factoring company can undertake to make sure they live to factor another day.
#1
Re-underwrite every client in your portfolio.
Yes, now is the time to know what you have, the good, the bad and the ugly. Trust me; every portfolio has some ugly in it. There is no better time than now. Sure, most factoring company’s resources are already stretched beyond the limits due to the influx of new business, but if you don’t stop to take a look at what you already have, you will be in for some trouble.
While the economy had been growing by leaps and bounds and credit had been so readily available, every factor benefited; we took on clients whose risk profile was higher than we would like to admit. We cannot bury our head in the sand anymore. You have to know what portion of your portfolio is performing and which portion will become plagued by the recession.
If you do not have current financial information on your clients, now is the time to request it. If you don’t have a recent UCC search, why not run a new one? When was the last time you engaged in a background check on existing clients? It’s time to look beyond historical dilution and trends, instead it’s time to take a reading on the client’s overall financial health as that is the indicator which will foretell their ability to survive.
#2
Re-structure Relationships
When you find those clients most negatively impacted or the clients whose financial risk profile has changed, you must seriously consider altering the structure of that relationship. For example, you may have taken a secured position on a piece of commercial real estate as secondary collateral to support a factoring relationship whose risk profile was not in line with your traditional limits. What is the value of that real estate now? What is the financial health of the client now?
If revenues are down, how is that affecting the business? What can you really do when you are already in a relationship? Make sure you are utilizing every collateral monitoring and availability tool in the book. Don’t let invoices age; don’t take on unnecessary credit risk. Counsel your clients on being very careful about extending credit terms to marginal customers. Start building additional reserves if necessary.
Reduce your exposure whenever possible. Make sure your client’s maintain some skin in the game. Consumers are walking away from the value in their homes because they just can’t make ends meet. What decisions will your client have to make with their business? How does that impact your existing A/R?
#3
Get your house in order and have a contingency plan.
Since we don’t know what surprises are on the horizon for the next 12 months, it might also be a good idea to keep your books and records in manageable order. Whether you have $500,000 of your own funds employed or you work for a company who has $200 million employed, there is a very real possibility in 2009 that a factoring company’s access to additional capital will be slim to none.
Be prepared for an audit either from your capital provider(s) or from which you are seeking capital. The better your files are, the better your audit results will be. It doesn’t hurt to triple check that your documentation is in order, proper names, trade names, and all that. By the way, when was the last time you checked to see if a client was still operating under good standing status in their state, update everything in your files!
Factoring companies may find it hard to raise capital in the form of subordinated debt; others may find that their institutional funding has dried up. Worse still, your lender could exit the business abruptly. Have you taken the time to review your portfolio and operations to make sure it remains attractive to capital providers?
Seek out assistance within the industry or outside of the industry, but do something and have a plan in place should something like this occur. If you make it past 2009 and the economy heads upwards you may breath a sigh of relief – until then, how prepared are you?
#4
Keep employees educated and motivated.
Factoring is such a unique business, there is a human element deeply engrained in this profession. Make sure the folks on the ground know how to sniff out problems. Account Executives shouldn’t let a week go by without having some contact with the principals of your clients.
Stay involved in providing continuing education to every member of your team. Let them know that the playing field has changed out there. It’s not all about proper verification and notification anymore. Your team should be looking out for different kinds of stresses such as signs of employee theft as well as pre-billing, over billing, and the like.
#5
Don’t be afraid to take action.
Sometimes, as a factor we are faced with making unpopular choices, especially when it comes to calling a client in default and entering into a realization phase. Now is not the time to use hope as means to operate, it is the time to deal with facts. Clients who do not have the ability to cash flow even with the factor’s funding may simply be too big a risk to continue servicing.