e1bd96b3c40e992c1I realize this is out of the segment for my weblog… however, I believe this is a necessary topic to begin yet another subject: Early Warning Signs. Too many times, factoring companies come to the rescue too late. It is better to identify a problem before it actually becomes a problem. With that said, my first example: skipped invoices…

This one is tough if you don’t factor all of a company’s invoices. However, if you are factoring all of the invoices, then sometimes you need to take a closer look. Honestly, this is one of those little things that you may not pay attention to on a day to day basis. Many factors do not. It is something that seems extreme… after all, who can pay attention to everything, right?

Well, I don’t always myself. But, then you hear the story of a factor that purchased invoices wherein the debtor did not pay ultimately because of fraud that may have been recognized if the factor had first noticed the skipped invoices and those payments:

For example, a factoring company purchases invoices numbered ABC1 through ABC10; however, the company and the factor always had a long term relationship. They also had a long standing arrangement wherein the factor no longer called on all the invoices… they [the factor] had complacency in the relationship… the client account always worked well; therefore, why call on every invoice? Why call until the invoices reached the 75 day mark?

Along these lines, the next schedule included invoices ABC15 through ABC 18. Yes, some invoices had been skipped; but, again, everything on the account had worked well to date. The client account and their invoices had run well. The aging trends had deteriorated; but, the client relationship remained intact and encouraged waiting for the invoices to pay… no reason for collection calls to confirm the accuracy of the invoices based on the client history, right?

Unfortunately, the ‘real’ invoices were those with numbers from ABC11 through ABC14. Those invoices submitted prior were invoices submitted to the factor for funding only… they were not real invoices… the client had been submitting pre-billings… hoping for the work to be completed. Then, the client had invoiced for the actual work completed later.

Not only is that pre-billing, but the client had submitted invoices for funding in the second schedule for the work performed and advanced by the factor on the first schedule. Essentially, the factor had been double funding the work (i.e., funding the pre-bill and then funding the real bill). The factor just didn’t realize it because the real invoices were considered ‘non factored’ invoices and made up the difference… (If you are following this you may want to look at your client’s invoices and collections closer).

So, how do you know? Well, here are things to watch for:

-          The average pay days begin to slip; debtors do not change their payment history overnight unless a significant problem exists with that debtor’s capacity to pay. Watch for slower payments within the client and the debtor.

-          Dilution (non-cash reductions to receivables including credit memos, rebilling and billing errors, etc) increases wherein the client bills for work that has not been completed but then re-bills for work when it is ‘really’ completed.

-          The client is receiving the checks and redirecting them to the factoring lockbox… this can only been seen if the factor actually looks at the checks. Who are the checks being made out to and where are they [the checks] really being sent? Then, what do the remittance copies include? Do they match up to the invoices factored or are those checks missing the remittance (i.e., invoice numbers and amounts). Note: if you are only receiving the check image without the remittance advice, then how do you know how to apply the check accurately?

-          Trends within the client management of the account change (i.e, the client isn’t as responsive to your requests, etc).

-          The collections and the payments don’t match. Compare the payments received to those charged back, non-factored, etc as this may be telling. Do they balance? Did the non-factored money come into the lockbox? What happened to those invoices that were charged back? Did they ever actually pay? If not, why not? Do you know?

All in all, it’s about watching the collateral, looking for trends and anomalies, watching the turnover of the accounts (i.e., the DSO, collections to purchases, etc), ensuring what you purchased as a factor ties to the checks being written by the debtor, and ultimately knowing the client’s billing practices as well as the payment habits of their customers.

Knowing and recognizing these aspects helps to identify early warning signs within a portfolio… before a potential problem develops into a loss. Identifying and monitoring these concerns can ultimately help mitigate those losses, as well as provide examples to your factoring personnel of ‘things to watch for’ within a client base and portfolio. The potential of recovery is greater for those client accounts in which a factor remains proactive and aggressive. 

Again, early identification remains critical. Losses can be mitigated by seeing early warning signs wherein the collateral and performance may be deteriorating…

I could go on and on about this aspect; however, this is only one element that exists within the overall management of a client account. Ultimately, it remains a small detail of what to watch for within client performance compared to those other signs that are more commonly known. Hence, there will be more “Early Warning Signs” to come in future blogs…

Wishing You Success. The Factor Guru.