As the end of the year nears and a new one begins, here are some tips that some of you have provided to share with our readers, all of which relate to fraud prevention. Thank you for your comments and emails.

What if you suspect a fraud? Have you ever considered taking a portion of the verbiage on an invoice and entering that into a search engine on the internet? This may sound really crazy, but recently someone I know did this as the items being billed for on the invoice looked “off” and the descriptions were extremely long. As it turned out, the exact verbiage was found on the marketing products page for a completely different company.  The prospective client had copied and pasted the verbiage from a site in their haste to prepare invoices. What did the factor say, “Plagiarism is not limited to college or high school term papers anymore.”

With technology today, it has become increasingly easy to create, edit and submit invoices, purchase orders, and even billing documentation. You can find a lot on the Internet, and there are several tools that allow for editing PDF files and other documents that now exist. Just think of all the tools you have access to in your daily work.

Even more so, what about those prospective clients or clients who have also created account debtors? Yes, this can be done and is done. You can check credit agencies, secretary of state websites, and perform Internet searches on the customers. Sometimes a simple credit report is not sufficient. Plus, it is important to know which credit reporting agencies take reporting from the company being reported on (self reporting) versus accepting credit reporting only by third parties. If you are not sure, find out before you rely on simply one credit agency.

All of this is time consuming for the prospective client and for the factor to research, but it can be done. More importantly, it has been done and is being done today. When money is involved, people looking to initiate a fraud will go to great lengths to convince you to send them money. Creating the story and covering their tracks is what they do all day, every day.

When someone who commits fraud goes so far as to set up fraudulent debtors with websites and state registered companies, even if you cross check a phone number or address on the Internet, your independent research will reveal matching results with what your prospective client has provided to you, the factor.

One way to attempt to catch this is to check out the domain name for the debtor; this also works on email addresses as well. Watch for discreet domain ownership as this type of service can be used to hide a potential fraud.

On another note but along the same lines, have you ever had verification calls that went too smoothly? This with forwarded phone calls, Internet phone services, prepaid cell phones and other methods of hiding the true person you are contacting will also help a company commit fraud. If the company is valid, there should be a land line that can be identified with that company.

Well, that should be enough fraud facts for now. Thank you for your comments and tips. Please keep them coming.

Wishing you continued success. The Factor Guru.

Did you know that you can reverse search debtor websites or even debtor email addresses by looking up the owners of those domain names? These are helpful to be sure you are receiving an independent verification from the debtor. After all, who owns the website where you are verifying the receivables? Where did that confirmation email come from? Was it from the debtor, or could it be from the client? I typically use Go Daddy to research this information.

On their home page, there is a domain search field where you can enter domain names or even try email address extensions (i.e., factoring.org). The site will tell you if that name is already registered. Then, you can just click on the link that says “Get Info” to see details on who owns that domain.

Why do we use the term ‘rely’ when we send out those written verification letters or when we pre-verify receivables? If you tell the debtor you are relying on the information they are providing to fund an invoice, then they know you only funded based on their response. This helps when pre-verifying invoices to ensure that the proper message has been conveyed. And, as a side note, if you verify an invoice after the fact, then you would not be relying on their information. That is why these post-funding calls are typically considered confirmation calls only.

What are some early warning signs and red flags to watch for during the verification or collection process?

• Credit memos, disputes, offsets start to increase
• Quality issues arise more frequently (i.e., incorrect product, damages)
• Debtor responses for verifications / collections decrease
• Key personnel changes at the debtor or client
• Clients picking up checks or changing factor remittance
• Average days to pay increases
• Payment patterns change
• Invoice receipt delays by accounts payable
• Billing errors increase
• Invoice dates vary (invoice date on invoice versus the date on the debtor’s check)
• Name changes on invoices or remittance (ABC Mfg Co now says ABC Company)
• Skipped invoice payments

Until the next time… Wishing you continued success. The Factor Guru.

A few weeks ago, an underwriter contacted me about her process in reviewing a new deal. She also wanted to share some Red Flags that arose in her process.

The prospect had been owned by one party, but all correspondence had been through another individual. We’ll call him Joe. The underwriter on the deal felt that Joe, although stating he was forthcoming, continued to omit pieces of information. She went through her six C’s of credit ultimately concluding to decline the deal.

But, let’s start at the beginning, the credit.

The debtor credit was insufficient for the amount being requested; the credit department was looking for additional history to support the request. In the interim, the underwriter requested copies of invoices. Joe said they did not invoice the debtor. Instead, they provided handwritten backup to the debtor and the debtor invoiced the client. The underwriter never did receive a report or copy of these debtor invoices.

Speaking of credit, the application noted another person owning the business, not Joe. The owner’s personal credit and background appeared good. However, the documentation on who actually owned the company legally did not link back to this person. Moreover, Joe had been the one to provide all correspondence, since he was who was running the daily operations. Since Joe did not own the business, he also would not sign an application for credit or background checks, nor would he sign any type of guaranty. After all, he was just helping out the owner to start the business.

The underwriter then decided to start searching – the Internet – there were just too many pieces that did not add up in the story. After trying different search phrases, there it was… Joe was no stranger to factoring. In fact, he had defrauded other factors in other states using the same strategy. Unfortunately for him, one of those times, he had the business in his name.

But, it was the Common Sense part of the underwriting process that led the underwriter to search a little bit more on the Internet, where she ultimately found these articles. Afterwards, she prepared some Red Flags to think about when going through this process:

Red Flag # 1:

“This prospect was almost overly friendly, likable, and eager to help. Fraudsters know that they need to become your friend first in order to drop the wall of skepticism between you. Typically prospects will get exasperated with the front end factoring process at some point in time, but this prospect was always making reassuring statements such as ‘we will get whatever report you need, and I will make sure that it has every piece of information you need is on it’.  He also didn’t even hesitate when I asked to speak directly to the debtor at an early stage in the underwriting process which would typically be a good sign.”

Please note that the reports were never received; the conversation with the debtor was never had.

Red Flag # 2:

“Double Talk. After going through a few questions on the underwriting call, specifically Joe’s background and experience, I felt as though we had talked for over 20 minutes regarding his background yet I couldn’t tell you one thing about him. Keep in mind that he wasn’t the owner of the business, but was acting more as an advisor and therefore we didn’t have any information on him (application info, background/credit information, driver’s license, financials, etc.). I pressed a bit further and nicely let him know that I still really didn’t understand what his experience or background was and that this is an important piece given the fact that it is a start-up operation. At this point, he finally realized he would have to give something concrete and told me that he used to work in the sporting goods industry (still not much). As we know, when answers are vague, that is when you need to keep pressing for better answers.”

This is another tactic fraudsters will use (see How to Smell a Rat).

Red Flag # 3:

“Physical signs of discomfort. When pressing the individual for a background report, I not only got an excuse as to why that wouldn’t be necessary, but he also mentioned his age along with the a reference as to his great character accompanied by a sort of numerous small coughs that had not been there previously. When attending the IFA’s fraud seminar this past year, a former FBI agent spoke to the group regarding various physical signs of distress. This was clearly a sign of distress as he had never done that in our previous conversations, going back to what the agent called ‘knowing your prospect’s baseline’.”

Thank you for sharing your experience with our readers.

Wishing you all continued success. The Factor Guru.

The amount that can be advanced to a client is generally expressed as a percentage, called the Advance Rate. Typically, this is calculated as a function of Dilution (which is the percentage of an invoice that is not returned or paid). Dilution includes discounts, returns, allowances or any reason an invoice is not paid in full. Many factors will use a multiple of Dilution (3x or 4x) to establish the Advance Rate; other factors typically just add 10% to the dilution.

Tip: You may hear or see on factoring reports the words Chargeback, Recourse, or Adjustment… these are all dilutive items.

For illustration purposes, if a client sells $10,000 in widgets to their customer and a factor advances 80%, the client would receive $8,000. Then, when the customer (debtor) pays for the products, let’s assume they only pay $7,500 claiming they had a credit on file for $2,500. Therefore, they do not pay the full amount of the invoice. The portion that is not paid is considered dilutive, or Dilution. Of the $8,000 the factor sent to the client, only $7,500 was received. The factor would still be owed $500 plus any factoring fees.

It is because of this that setting an appropriate Advance Rate is important, as well as monitoring the client’s ongoing Dilution. This also highlights why during verifications and collections factors will inquire as to open credits, other potential offsets, discounts, disputes, etc.

Chargebacks / Dilution:

Did you know that many recourse factors may ignore chargebacks after recourse to a client. For example, if an invoice hits 90 days, they may just charge it back to the client without wondering or asking Why? Since the invoices purchased should include services that are completed or goods that have been delivered, why are there chargebacks?

• Was it a discount that was pre-approved in the client’s terms if the debtor paid quickly?
• Were the goods damaged or of poor quality? Is this an ongoing issue with the client that should be watched in the future?
• Was the account debtor a bad credit risk and didn’t have the ability to pay?
• Did the debtor request a credit and rebill for a reason? Do we know the reason? Does it make sense? And, did the invoice date stay the same or did they re-date the invoice?
• What was the ultimate outcome of the chargeback? Did the invoice pay later? If so, who did the money go to? If not, why was the invoice never paid?
• Did the client ‘pre-bill’ the invoice and not finish the work?
• Are there offsets that the debtor took against the invoice that we did not know about (i.e., contra account, deposit, other open credit memo, volume rebates, year end rebates, restocking fees, co-op charges, etc)?
• Was the invoice even real?

Remember that a factor purchases (buys) an invoice from a client and gives the client money against that invoice. For example, ABC client sends in an invoice for $50,000; the factor reviews the paperwork or verifies the invoice to ensure the work is completed. They should also review the debtor’s credit to be sure they have the ability to pay the invoice. The factor then buys the invoice, advancing typically 80% against the invoice amount. In this case, on the $50,000 invoice, the client would have received $40,000. If the invoice is later not paid, then how does the factor get repaid on the $40,000?

This is the reason that reviewing invoice documentation, verifying invoices and checking debtor (customer) credit are so important to a factor. Good factors know why these chargebacks occur and manage that risk.

Wishing You Continued Success. The Factor Guru.

This story, along with the some of the points below, is from the book How to Smell a Rat.  Although the book focuses on financial and investment fraud, some of these signs are similar to what we may see in factoring. What are some of these signs?

The package is too good to be true. I don’t think we need to go into what this means here… we have all seen this type of deal.

What the business does or what their billing process is seems “too complicated” to describe; remember, if it is not clear, ask again. Then, if you still do not truly understand, ask again. Don’t be taken off guard should the prospective client seem frustrated with you… it may be purposefully complicated. One important fact: part of a fraud is that you do not understand.

If you do not understand the billing, then it would be impossible, or at the very minimum challenging, to review the invoices and documentation to know: what is being billed for, if it is completed, if there are hidden or unknown offsets or reasons for non-payment to occur, if there are required contracts or forms that need to be completed and submitted with the billing, etc. This would also fall into the category of not understanding an industry.

For example, if you are not familiar with the construction industry, it would be easy to over bill on invoices, or jobs. In addition, you would not understand the risks of funding on retainage invoices or ensuring subcontractors for material and labor are paid timely. You would have the potential of having factored invoices that were not approved, as the work had really not been completed for the amounts presented. This may mean only 70% and not 90% of the work had actually been done. Or, the work billed for was not allowable under the contract. No change order had been presented (i.e., the contract was for $150,000 and the invoice was for $175,000 because the client had received only a verbal request to do additional work). And, on those subcontractors not being paid timely… you could run the risk of receiving short pays on invoices as part of the monies were sent directly to the subcontractor or material supplier.

Another sign: You did not do your own due diligence, relying on a trusted friend or intermediary. This also includes the “friend of a friend” scenario. Sometimes, good reputations can be built or manufactured by those who provide charitable donations, who are active in politics, or who are part of affluent groups. Think of Madoff, who once had a strong reputation; many people gave him money because of his reputation… not because of the facts or their own due diligence or investigation.

What about the referral from a friend, or from someone within an affluent circle? Underwriting or completing due diligence is an ongoing part of what we do as factors. Ensuring that this process is completed by you as the factor is also just as important. You cannot rely on a broker, a friend, a third party or another factor to do this for you, as you do not really know what kind of due diligence they have done.

It should be noted that some fraud can also be internal to the factoring company. Yes, just as in any business, it can happen. Having checks and balances in place may prevent employee/client collusion. For example, does the same person verify invoices, review paperwork, buy schedules, post checks, and collect on invoices? Who wires out money to the clients, and who ensures that money went to the clients? Is there anyone else within the organization who audits or double checks that these duties are being done accurately? What checks and balances do you have in place for these activities?

There are obviously many more signs of fraud that can and do exist. These were just a few highlights selected from this particular book, as it was the title that originally caught my attention.

Wishing you continued success. The Factor Guru.

Yes, there was a lot more going on in 2008 than just these rising fuel prices… kind of reminds me of now, except today we have a weakened economy slowly showing signs of improvement and gradually increasing consumer confidence. Of course, this does not give a lot of lead way for the possibility of the housing market to fall into another downward spiral, for unemployment numbers to remain at similar levels where they are now over the course of 2011, for the oil supply to continue being focused on importing while drilling remains on a permatorium (is that an official word), and the list goes on… we haven’t even talked about the Middle East (at least not directly)…

But, let’s look again at those escalating fuel costs projected for this year and the next. Learning from some of the lessons in 2008, many trucking companies were slow to react with fuel surcharges. Although many anticipate a faster reaction to these rising costs for this time around, transportation business owners do not believe that these surcharges alone can help recover these diesel fuel costs and resulting losses. This comes at a time when trucking companies are looking to replace equipment as they have spent the last few years getting through with what they have. Now, it’s time to update their fleets and meet new regulation requirements. Financing for these fleets may continue to be a challenge though.

Another potential for concern as prices continue to rise is the impact to shippers which affect several industries. Could fuel usage patterns force shippers to consider such options as bringing manufacturing sources closer to their facilities? Could consumers start pulling back on other spending and becoming more frugal once again? What impact will all of this have on the economy for small to mid-sized businesses, lenders and the factoring community?

There was only minimal growth through 2008; the factoring industry grew only 0.5% from 2007. The question for now: what does all this mean for the rest of 2011? What kind of growth can be expected for this year and the next? One can only look to make assumptions, which may not necessarily end up in a good place. Assumptions usually do not…

What do I get out of all the projections for the rest of this year? “Warning, Will Robinson…” Proceed with caution. Continue staying focused on your portfolios, especially on debtor credit, concentrations and debtor payment patterns. Be sure to look at background reports on owners and research other companies for alter egos or related companies. Be diligent in watching for early warning signs and identifying red flags to prevent fraud or mitigate potential losses. And, just in case, it never hurts to be lean (not necessarily mean). Continue looking for ways to become more efficient and keeping costs down in your operations.

Wishing you success. The Factor Guru.

Once in awhile, however, a new prospect with a ‘rush’ closing comes along which can create tension and add stress between the sales and the credit departments within the factor’s business. This is normal.

What is not normal, however, is for a factor not to execute the verification process because of a rush situation or because of this added stress. Have you heard that other phrase about how stressful situations reveal character? That principle holds true here as well.

As many of you know, we all share stories after time has elapsed. These can be expensive lessons for those with the story to share, but they can also become learning opportunities for others. Over the past few years, I have come across a few stories that all focus on the same underlying issue: Bulk Verifications. (I really do not know that this is the correct wording; it’s just the wording we’ll use for today).

This occurs when a factor attempts to contact the debtors’ accounts payable departments to verify invoices. Instead, the debtor is only able to verify the balance owed (in bulk) or the checks to be written (i.e., $50,000 in outstanding receivables) – they cannot confirm the actual invoice numbers or details for that open balance.

In a rush situation, the factor may look at the invoices the prospective client provided for purchase, which total a little more than $75,000, and incorrectly assume (i) the $25,000 in additional invoices are probably just new invoices that are not in the accounts payable system yet and (ii) that the $50,000 in invoices have been verified. Yes, I did say incorrectly. This response should not be considered verification.

Why? Sometimes, in those rare situations, the prospective client could have sold the factor invoices that had already been paid and/or included some fraudulent invoices in their schedule or batch. When the $50,000 that the debtor has on the books later comes through the factor’s lockbox, that check may not include invoices that the factoring company purchased, meaning those funds will more than likely be processed as non-factored and returned to the client. Where does this leave the factoring company and the $75,000 they sent to the client?

There are other situations where bulk verifications may be the only way the debtor will confirm, and the factoring company may decide to accept this form of verification. Consideration for this may include the debtor’s concentration level, prior experiences with the debtor, copies of check remittances from prior payments received by the client, type of invoicing and backup, etc. The point, however, is to be aware of the potential for this risk and to ask yourself, “How do I know that the invoices I am factoring will be paid?” After all, that is the point of verifications.

So, next time you are in the middle of that rush closing and stress levels are on the rise… be sure to follow your process. Don’t take a shortcut or an easy way out hoping everything will turn out okay. Reveal your true character as a factor – “Trust, but Verify.”

Wishing you success. The Factor Guru.

And, before I start, yes, I know it shouldn’t come down to having to do this. You should be hopefully talking to your clients on the phone every month and not just communicating by email. Although, I doubt you would be surprised how often we seem to do this anymore… Creating a verbal dialogue and building a relationship can be instrumental in working with your clients.

You may find out more about them and their business through those conversations than you ever would in an email. What is going on in their company? What potential new sales are on the horizon? Are there potential cutbacks that may occur? These issues usually only arise during an actual “old school” conversation, not in an email. Sometimes, talking to the billing personnel or other employees will provide additional insight into the business. Building and maintaining that relationship is important.

Now, combine that information, what you found out by talking with your prospective clients and clients, with the news and research available through the Internet. Go to your clients’ websites every once in awhile or look them up online. You may be surprised at what you find, not just for potential clients in the underwriting process but also for your existing customer base.

After all, it does happen. You have a long term client… you know the one that has been with you for a long time… they tell you everything… why would you search them after all these years? Well, maybe they sold their company and didn’t tell you. Maybe they have litigation going on that you didn’t know about. Yes, I really mean this can happen, does happen, and you may not know. Every few months, it doesn’t hurt to check your clients’ websites and search their company name(s) or owners’ names on the Internet.

So, let’s go back to how to find the value from researching clients online. Why don’t many factors utilize this free tool? It is probably because a lot of people do not know how to research appropriately. Hence: no value.

But, here are some hints that may help overcome that perception so you can see that the value does exist:

Don’t just enter a name. For example, if you just enter the name of the client, ABC Manufacturing Company, you will get some results for everything with ABC and Manufacturing and Company in the name. However, if you wanted to narrow your search down to “ABC Manufacturing Company” (with quotes) then it will pull only those articles where an exact search for “ABC Manufacturing Company” [whatever is in the quoted area] occurs.

Then, if you want to narrow your search even more, you can add on to your search terms with an ‘and’ or a ‘+’ in between the search terms or quoted items (i.e., “ABC Manufacturing Company” and “Fraud,” etc). You never know what you may find, from complaints to litigation.

This works in reverse as well. If you pull up “factoring” and don’t want to see mathematics statistics, then do a search for factoring –math (with a minus sign), and it will eliminate those results.

Be sure to mix it up. Try using states or towns, other terms or owner names to see what additional information is out there. You may also receive different search results depending on if you are using Yahoo or Google as well. Try them both once in awhile.

Please remember that not everything you read on the Internet is true; however, it may give you information that proves to be useful later. You can even find old clients that owe you money still, just by doing your research. There may be a client that closed their business and opened up a new one (maybe even in a different state)… you may be able to find them too! You really can find almost anything on the Internet.

I have always recommended using this tool, along with Pacer or other services that provide background reports on companies and individuals, during the underwriting process for new clients; I should stress that you can use these for existing clients as well as those you are looking to collect out on or during litigation. Occasionally, you can find other customers to notify, alternate locations, or even other companies you did not know existed.

Not to be cliché… using the Internet may actually be like a box of chocolates. After all, you really do never know what you are going to get.

Wishing you success. The Factor Guru.

Most factors avoid construction because of the high risk in handling these invoices.  To make significant money the factor really has to be properly set up to address this niche.  In the case of our portfolio, we add one primary eligibility safety net by only entertaining public works construction projects.

How does a factor who does not specialize in this niche know that a colleague has the capacity for public works construction?  Question them about the following capabilities:

—Does this factor engage in “progress billing”?  Can they handle invoices covering a percentage of the completed project which are part of a larger contract (different from spot factoring where each individual invoice closes out)?

—Will this factor take on “bonded contracts”? Will they factor receivables even though it is implied that the surety is in first position?

—Does this factor have a “disbursement program” with funds control, so that advances are only used to pay costs on that specific job?  Through this program the factor provides a high level of assurance to project owners, General Contractors, etc. that funds advanced go only to that job before any other contractor expenses get paid.

—Can this factor undertake initial plan reviews, evaluating the project and the bid of the contractor to make sure that the contractor has the ability to perform the work estimated with their available labor using the specified materials required in accordance with the pricing quoted, in the time frame provided?

The 6-C’s of credit (Character, Capacity, Capital, Collateral, Conditions, and Controls) are the key for factors to analyze contractors and subs seeking working capital and cash flow.  It is critical for both the contractor and the factor to fully understand their transaction.

To pre-qualify a prospective contractor or sub, company ownership, structure, existing lending relationships, current accounts payable and accounts receivable aging summary are evaluated. Also reviewed is the current and previous year’s financial statement including balance sheet and income statement. We look for a candidate who does not have liens and judgments that can get between the factor and the receivable.  We look for a record of past profitability and whether margins exist to be able to afford our form of capitalization.  At this point of the discussion, a demonstration to the contractor of how our capitalization increases their ability to be profitable and benefit from procurement discounts is important in selling a deal of this nature.

Additionally, the prospect should have at least one or two years of experience in the type of construction they are working on and have a personal credit score of 550-600 or higher. A lower credit score does not always prohibit the factor from proceeding, though. The factor must determine why the contractor suffers from weak credit and determine if there are actions that can be taken through the factoring of their receivables that can result in the contractor becoming credit-worthy without increasing the risk to the factor.

Because most banks continue to be unwilling to lend working capital to contractors, the current need in this space is extraordinary.  Factors should not dismiss these opportunities for income-producing deals in the building trades and general construction which are ready-to-go.

About the author. Earl Harper is a Senior Vice President with RMP Capital Corporation, a national factor specializing in public works construction based in Islandia, New York.  Mr. Harper has more than 15-years of experience with the management of contractor financing and employee benefit program administration.  Mr. Harper’s specialty at RMP Capital is servicing the needs and businesses of their client contractors, from bringing in new contractors, to giving extensive coverage and care to their existing clients. Prior to his success in the financial world, Mr. Harper spent over 24-years as a military officer retiring from the Army as a Colonel.  Mr. Harper is also a graduate of the US Army War College and has a bachelor’s degree from Iowa Wesleyan College. To find out more about Earl Harper or RMP Capital, visit their website at www.RMPCapital.com.

Maintaining strong client customer service speaks volumes! It says your clients can rely on you for their funding needs. It says your clients know they would rather be with you than another competing financing source. It says your clients stay with you because you are their right choice, the one they count on to operate their business. You provide the right service while solving their working capital needs. Again, they chose you and have stayed with you.

So, how do you ensure strong client retention?

You are candid. You ensure the reporting you provide is accurate and transparent. Clients can see everything online or you will provide the information. There are no hidden fees, untimely reports, or slow responses.

You are honest. Clients know where they stand and they understand the rules for funding.

You are reliable. Clients do not have to worry about their funding needs. They know they can rely on the stability of your company to meet their working capital challenges and daily operating cash flow needs.

You are available. Clients can call or email you and know they will see results promptly.

These are just a few of the concerns your clients may encounter when working with a financing company. Overall, communication is a key factor in retaining customers. Most of the time, fees are not the reason a client chooses a competing factor. It is not always about the price, even when they tell you it is.

But, it is critical to them to feel and know they can count on you, their funding source, to provide information and service so they can run their company efficiently. Remember, your clients have a company to run… they do not need to worry about their financing source on top of that.

Why is that important? In the long run, most factoring companies obtain new deals because of their existing clients, by providing referrals and recommendations. These relationships with already existing long standing clients can indicate the service, reliability, and even stability of a factor. And, your clients are a reflection of you as their factor.

What is that saying we always hear? You are who you associate with… Your old friends reflect who you are… they prove your history… they are the evidence of why you exist with the reputation you have. Ultimately, they have been with you and they want and choose to stay with you, no one else.

Focusing on your customer service is and continues to be an important element of what we do as factors. Client retention is essential, especially in the competitive markets in which we exist. Understanding your old friends and them understanding you and your business can be the key.

Wishing you continued success. The Factor Guru.