The Factor Guru

Tips on accounts receivable financing and business practices.

Archive for category General Information

Attorney Locator Service: a must have for factoring

May 11

Posted by Gen Merritt in General Information | No Comments

I realize this may come across as an advertisement… and yet I am going to say ‘however…’

This new service by the International Factoring Association where they announced the launch of an Attorney Locator Service is great. Do you realize the number of factoring companies that have clients in other states and markets? When a problem or concern arises in these other states, having an attorney that understands those state laws can be invaluable.

For example, I have had that fated call from a factor where they needed a local attorney (in that market)… they needed them to help but to also understand factoring. They called someone from the Internet. In fact, this one factor I spoke with spent several thousand dollars on the education process for the attorneys, only to find out the attorney they were using learned ‘a little too late.’ The attorney’s initial complaints did not address the proper arguments; they actually approached the suit as a ‘consumer’ suit… their reasoning had little to do with factoring or the sale of a receivable… let alone payment over notification. After all the legal fees and ‘education,’ the factoring company actually dropped the suit due to the legal fees (costs versus reward). A “pre-screened” attorney, endorsed by another factoring company, could have saved them money… and resolved their lawsuit.  I wish this service had been around several years ago.

Although it seems basic, factoring does require a special niche in the legal realm. Those attorneys who have experience in this segment of commercial finance can help, where others may spend your dollars educating themselves on our industry: factoring.

So, today, this new service through the IFA is designed to match factoring companies, asset based lenders and other receivables finance companies with the right attorney for their needs.  This free service can be accessed on the IFA’s website at Attorney Locator Service link and by selecting attorneys in the vendor category listing.  The IFA’s Attorney Locator Service is searchable by geography and practice area and provides a simple, reliable way to find a law firm which has been “pre-screened” by a peer.  Attorney specialty practice areas which are searchable include Bankruptcy, Collection/Litigation, Article 9, Contract Law, General Business, Litigation, Tax Law and Factoring.

Since these attorneys have been “pre-screened,” it makes it more efficient and more reliable for identifying an attorney who can help when the time comes… and it will.  So, yes, this seems like an advertisement… but it somewhat is. I do endorse it and wanted to be sure to share this link, as it adds value to us all.

Wishing you success. The Factor Guru.

Tags: , , ,

Who is Hammurabi: A Brief History of Factoring

May 5

Posted by Gen Merritt in General Information | No Comments

If you attended the April 2010 IFA Annual Factoring Conference, you may have dropped in on Factoring Jeopardy, where you were sure to see that certain categories did not fare so well for those participating in the game. For me, that category was of all things: History.

Yes, factoring does go back over 4,000 years to the Mesopotamian King Hammurabi. He was the ruler who established the world’s first metropolis, Babylon, considered the bed of civilization. The Mesopotamians are accredited with being the first to implement notes/borrowings on clay tablets between two parties. These clay ‘contracts’ indicated promises to pay; they were promises for future payments. This concept expanded trade and increased economic power for that time, setting a foundation for certain alternative forms of finance today.

Since then, factoring has evolved becoming a critical financial tool for doing business in almost every civilization that followed, the Romans included, who were the first to sell discounted promissory notes. The first documented form of factoring in the American colonies, however, was prior to the revolution.

Merchant bankers in Europe gave the American colonists advances for materials, allowing the colonists the ability to harvest their lands. Raw materials like cotton, furs, tobacco and timber were shipped from the colonies to Europe. Factors during these colonial times advanced against the accounts receivable of these companies. This practice became very beneficial to the colonists, as they didn’t have to wait for the money to begin their harvesting again.

Later, during the economic revolution, factoring became more concentrated on the issue of credit, as factors began assuring payment for certain clients (today known more as non-recourse factoring). Before expanding to varied business types after the war, factoring specifically catered to the textile and garment industries in the United States.

By the 1960s and 1970s, an escalation of interest rates and tighter credit spawned a new interest in the factoring market, with a number of private factoring companies coming into existence. By the 1980s, further rate increases combined with new regulations within the banking industry caused many small businesses to seek alternative sources of funding outside of traditional banking. It was at this time, factoring became a more popular option for many of these companies.

As many of you know, factors make funds available even where banks cannot often do so; typically, factoring companies focus on the creditworthiness of the customer (debtor). In contrast, the fundamental emphasis in a bank lending relationship is on the creditworthiness of the company itself, not that of its customers.

Factoring is a financial transaction wherein a company sells its invoices/accounts receivable to a factor at a discount. In exchange for this, the company receives immediate working capital. Three parties are involved in the transaction: the factor, the company seeking financing and their customer (the account debtor). The sale of the accounts receivable transfers ownership of those invoices to the factor, at which time the factor obtains the right to receive the payments made by the customers.

Today’s factoring still focuses on advancing funds to small to mid-size, rapidly growing companies who sell to larger, creditworthy customers. Factoring is among one of the most effective and efficient forms of financing utilized by businesses. It immediately improves the cash flow of a business.

In addition, today’s factor offers other support services for their clients including providing credit checks on new and existing customers, sending monthly statements to customers for payment, performing collection calls, processing and maintaining history on invoices and customer payments, and providing reporting for this information, typically with online access for the client. Some factors even provide additional financing services for their client companies.

After all of that, the only history question from Factoring Jeopardy that this actually addressed and answered: Who is Hammurabi? I no longer remember the other questions… maybe some of you do and want to comment…

Wishing you success. The Factor Guru.

Tags: , , , , , , ,

Banks and Equity Funds Starting to Look Again for Accelerated Returns, a guest blog by Neville Grusd, C.P.A.

Mar 18

Posted by Danny Frank in General Information | No Comments

It is widely acknowledged that the past eighteen months have been one of the most challenging “survival of the fittest” periods in modern history, for factors.  Yes, our economy and specifically the commercial finance sector are now budding a few small signs of stability with dashes of optimism.  (We are a long way from seeing the frenzy of liberal capital and loose credit which characterized our industry less than five years ago.)

The hibernation of hedge funds, private equity interests and investors is ending as they become hungry for stronger returns.  However, coming from a strategy where this community pretty much shut down their money flow altogether—they now want very high returns in exchange for cash and credit lines.

Meanwhile, commercial banks have turned off their lending spigots for small business because of the volatile credit conditions, and the aggressive enforcement oversight by government regulators who prohibit these lenders from any perceived questionable transactions.

At this time, the credit line needs of factors should be one of the best income-earning risks which banks can entertain.  Unfortunately, many bankers have a mind-set:  They do not lend to finance companies.

When their questions and concerns about this issue are examined, their reasons are often distorted and lacking in fact.  Many commercial bankers ask:  “Why should our bank give a credit line to a finance company, when we would not make the small business loans being made by the finance company, ourselves?”  They argue that the loans often made by the finance company are to “unbankable” business entities.  These companies are not strong enough, not old enough, with a problematic track record and worse.

We are not lending solely on historical balance sheets.  We are lending mainly based upon collateral which we manage on a daily basis (while most banks only look at financial statements on an annual basis). We also look at a company’s future business based on their orders in the pipeline.

Commercial banks and factors need to find common ground to reach prosperity together.  When driving a car, do you spend most of your attention looking in the rear view mirror, looking at where you have been?  Or, do you stay focused on the windshield and watch where you are going as you move forward?

If those “unbankable” small businesses have valued collateral, which we as factors and asset-based lenders can control—we are able to provide them money to help these businesses grow.

The lending marketplace has room for both the commercial bank along with factors and asset-based lenders.  If a business owner has a strong balance sheet, they are going to seek out a bank because it is cheaper and less work to submit occasional financial statements.  If a business owner is undercapitalized yet their company offers a lot of potential, and they want to take advantage of every opportunity which comes along—asset-based lending and factoring is very appropriate.

So long as banks conduct their usual due diligence, they will find that extending credit lines to finance companies is a good quality risk, many times better than their regular lending standards.  Most times these loans are diversified, spread out, over different industries, different geographic areas, different customers, different payment schedules, so the finance company is not dependent on any one particular loan, the risk is much less than they would find in one regular business.

Furthermore, the people running these finance companies are often very experienced, very professional in the depth and knowledge of the industries they are financing.  They are executives the banks can “talk to” as opposed to many businesses where an owner’s lack of understanding breeds a strained, perhaps, negative relationship.

Another silver lining, for banks giving credit lines to factors and asset-based lenders, is the potential of a finance company to provide mutual referrals.  As a business becomes more stable where it progresses into a more attractive prospect for a traditional bank, now the factor or asset-based lender is in an advantageous position to hand off their client to a bank of its choice.  There will be strong influence in that decision by the finance company which has helped the business owner.

There are only a small handful of banks which have recognized the vista of lending to finance companies. They have benefited from these relationships for many years.

About the Author:

BY NEVILLE GRUSD, C.P.A., EXECUTIVE VICE PRESIDENT, MERCHANT FACTORS CORPORATION (WWW.MERCHANTFACTORS.COM) WITH OFFICES IN NEW YORK CITY AND LOS ANGELES.  MR. GRUSD IS A DIRECTOR AND ACTIVE MEMBER OF THE EXECUTIVE COMMITTEE OF THE COMMERCIAL FINANCE ASSOCIATION (CFA).  HE IS A MEMBER OF THE EDITORIAL BOARD FOR THE C.P.A. JOURNAL, THE OFFICIAL PUBLICATION OF THE NEW YORK STATE SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS.

Tags: , , , ,

Scottsdale Bound a guest blog by Darla Auchinachie

Mar 11

Posted by Darla in General Information | No Comments

In six weeks, factoring executives will convene in sunny Arizona for the 2010 Factoring Conference.  I’m getting excited at the prospect of seeing all the folks I’ve met from past meetings.  From business acquaintances, to clients, referral sources, mentors, colleagues and even the dearest of friends – many of them will be in Arizona to interact and learn.  During each day there will be informational sessions and speakers who will provide insightful information and each evening provides opportunities for professionals to forge new relationships or solidify existing bonds.  I really don’t mean to make this sound like an advertisement as I write this I realize it may come across this way.  I guess that I am just a little fired up about seeing old friends and meeting new ones too.  You see I am proud to be a part of the factoring industry – I find that most of the people involved in this industry are exceptionally smart, somewhat boisterous and inherently generous.

I have received some phone calls this past month from newer entrants to the factoring industry asking me about this conference and if it is worthwhile to attend.  I respond, with full disclosure that I am actively involved with supporting the IFA and say wholeheartedly “OF COURSE!  This conference is a must for any professional associated with receivables finance in any way.”  I say if you can only afford (both in terms of time or money) to attend one conference each year then this is the one.  Yes, you can probably purchase an audio CD after the event – but that’s only half of the draw.

The people that you will meet at this conference you are likely to develop relationships with that will serve you well over the course of your career or through the growth of your company.  I’ve watched alliances form over the years… folks that met each other for the first time who nine, ten, and even 12 years ago are now engaged in participations together, have bought and sold portfolios amongst each other, and have hired one or another in various roles.  I’ve met owners of factoring companies who started with nothing and have grown their portfolio to wild heights.  I’ve met others who have built up a portfolio, sold it, and are now in their second round.  Sad to say, I have seen folks come and go too.  I’ve met new business development people who have moved up the ranks to sales managers, account executives who have moved up to operations managers, operations managers who have moved up to portfolio managers – and many of those will go on to start their own companies.  The amazing thing is that almost all of them will take a moment to provide advice and share war stories, or in general, they are just pretty fun to be around.

It is important to note that it is not just other factors who attend this meeting; Vendors, service providers, attorneys, complimentary businesses also are in attendance – these too can be healthy contacts for you. For example, I really enjoy the folks over at 20/20 Tax Resolution, Ansonia Credit, MotherFund and First Corporate Solutions just to name a few. They know their business and the factoring industry well. Think about it: Where else can you interact with the likes of Mike Ullman, John Beckstead and Steve Kurtz? Even the face reader guy, Mac Fulfer, is scary “spot on” with his observations, and Brian Van Nevel (who must have been a game show host in a past life) will channel his inner Alex Trebek for a very educational round of Factoring Jeopardy.  The creator of the Factor Guru blog, Genevieve Merritt, will be there as well as all the other contributing writers such as myself, Scot Pierce and Rich Eitleberg.

So if you haven’t already signed up… I’d be thinking of doing that soon.  The room block ends this weekend – I hope to see you in Scottsdale! It’s sure to be an educational and productive event.

Tags: , , , , , ,

Factoring and Gambling: Part II

Jul 17

Posted by Gen Merritt in General Information | 1 Comment

820928dbf1b9db54 As a follow up to the Part I weblog from May, here are some other pokerisms (if that is even a word – probably not) that may be useful in your journey as  a factor… or they may just be entertaining. Either works.

* Don’t be a “fish,” otherwise defined as a bad poker player. These fish never truly understand how to play the game; they just keep playing. In  factoring, if you fund enough bad deals or make too many exceptions to the rules that result in losses, you will eventually lose… you may even lose your  business. Good factors know the rules of the game, develop them, and execute them every day. If you are not sure where to seek assistance on the rules,  attend an IFA seminar or call the IFA, an industry consultant or even a friendly competitor for help.

* Don’t throw good money after bad… sometimes, when you have a problem account, you may believe you need to continue providing working capital to the company so they stay in business. After all, if you are short on collateral, how else will you get your money back? This decision is not to be taken lightly. You cannot hope your way out of a deal that has gone bad, as they say.

Do your homework. What is really going on in the client’s business? How can it be corrected? Take your time to identify your exposure and other repayment or collateral options. Understand the inter-workings and financials of the business itself. Will putting more money into the pot really help get your money back?

* Learn from your mistakes… it happens. We can all become complacent in our monitoring protocols with long time clients. We make exceptions to get deals done quickly, or we believe we have covered all of our bases (i.e., seen all the options on the river) during our due diligence… only to find we missed something extremely important (or misread our cards).

However, we can only get better if we actually learn from those mistakes. Go through your history of losses. Make a list and refer back to it. What were the reasons those losses occurred? What were the exceptions, if any, you made to get the deal done? What were the common characteristics between the various transactions? What have you learned from looking at this list?

* What’s that song? “…Know when to fold ‘em. Know when to walk away. Know when to run…“

Did you see the July weblog “Understanding the Story… What If,” a guest blog by Darla Auchinachie? Once in awhile, there is a voice tapping you on the shoulder saying, “Um, perhaps it’s time to leave.” And, sometimes when you listen to this voice, you live to play another day.

* One bad call in judgment can destroy ten good calls. How many deals does it take to make up for a loss on one bad deal? Do the math…

* At some point, you will lose. You really can’t win them all. Some elements are out of your control. Structuring deals appropriately up front will however help mitigate losses significantly. Ask yourself on every transaction you review, “Can I get out tomorrow?” If not, why not? What can be done differently should you need to collect out of the deal?

* Being aggressive can be a good thing. When a deal goes awry, it is better to act and act quickly. In factoring, the entire client receivable base can turn over in 45 days. The longer you wait, the further you may be from your collateral. And, don’t forget that the longer an invoice stays open, the harder it is to collect.

Good luck. Wishing You Success in the Game. The Factor Guru.

Tags: , , , , , , ,

Factoring is Like Gambling: Part I

May 5

Posted by Gen Merritt in General Information | No Comments

4d2eb19fabab5450-32Who said factoring was like gambling? Lately, now that I have been playing poker, I wanted to examine this concept… or misperception. Many people seem to say this ‘gambling’ comment flippantly only because of a perception that they believe exist. However, sometimes, you have to delve deeper… to find the truth. After all, perception is reality… right?

No. Not always, if you choose to look hard enough. So, let’s go with my basic assumption of Texas Hold ‘Em. After all, I am from Texas.  

The first rule: the one with the most bank has the best chance of winning. Do you have enough capital to play the game for the long run? Factoring is not a game you get in with limited capital. Don’t take it lightly. Real money is at stake. You have to have sufficient funds to play the game. One loss cannot dictate your endurance in running a finance company. Putting “all your eggs in one basket” may help you grow; however, can you survive the loss? If you experience losses, are you still in the game? And, will a large fraud break your bank?

If so, factoring is not the business for you… when you are new to the game. This mainly applies to those who do not do their homework, who do not understand that vigilance in underwriting and monitoring deals remains a key aspect to the factoring business. No one can teach you how to start a factoring company without also explaining the risks. It’s about your people, processes, systems… and more. Just think, all that is before you start.

You also have to understand the risks, how to mitigate those risks and how to monitor those risks over time. When you set out to start your factoring business, capital is essential… But, keeping your capital is critical. It’s not just about putting the money out there; it’s really about getting the money back!  Funny that in poker, it’s not about the risks, it’s really about getting your return (and your money back). Hmmm…

The next rule: Do you know the cards you have been dealt? Are you really looking at what’s in your hand, or are you just chasing the cards you think you have? For example, what do you offer relating to your corporate ‘tiers’ such as People, Processes, and Systems? These tiers are your strengths. Know your tiers. Know your strengths. Play to those cards. Within this,

First, know your people. Can the personnel you have handle the type of clients you are seeking? Can they handle the type of account management required for those specific accounts? Do those personnel truly understand the dynamics of various industries in which you may want to branch out into to diversity your portfolio?

Second, know your processes. Setting up procedures within your company can be essential. Think about those unique situations that require governmental regulations (i.e., Assignment of Claims, CAGE codes, etc), monitoring transportation carrier payments, or even subcontractor payments (i.e., lien releases, etc.). If the processes you have in place do not include this type of account management, then those processes are insufficient to effectively manage those types of client accounts.  

Finally, know your systems. Do you have the proper software to effectively monitor certain types of accounts? This also may include transportation, construction, or other types of processes and reporting that are being done manually within your company. Technology options exist that help monitor certain industries and assist in improving your systems to better manage your client accounts effectively.  

If you don’t know these basic tiers about your business as a factor, then how can you know what you can do? How do you even know how to read your cards? Again, if you don’t understand these fundamentals of your factoring business, you will experience challenges in managing your portfolio, let alone expanding or diversifying. Know how to read the cards you have been dealt.

With all of that said, I’ll save the next rules for another blog. But, good luck! Remember, know your capital. Know your cards.

Wishing you success in your game. The Factor Guru.

Tags: , , , , , ,

Trade Show Tips

Apr 12

Posted by Gen Merritt in General Information | Comments off

It’s that time of year when many factors, ABLs, companies and other businesses are exhibiting for trade shows and conferences. Therefore, I thought I would focus on ‘business tips’ instead of solely factoring. This blog will be basic trade show tips 101 for most; however, since the questions still come up, I thought I would just add it to the list of weblogs…

First, Keep It Simple. The job of an exhibit is to gain exposure, build credibility and find new prospects. Use your exhibit to provide a quick glimpse of what your company offers. A trade show display or exhibit is a serious representation of your company’s brands and business philosophy. Here are some things to think about to maximize the value of your investment:

  • Give promotional items… they are meant to be given and not taken.
  • Create an atmosphere that generates leads. Limited space does not mean limited selling potential.
  • Record your leads. Create a system to remember what type of lead you have, who you talked to, etc.
  • Realize when people stop, they want to talk to you.
  • Remember you are always selling… before, during and after exhibit hours.

Next, remember to staff your booth… don’t wait for prospects to stop at your booth. Be proactive. This also means: don’t stand behind the table–in fact, don’t put a table in front of your booth. Stand out in the aisle and greet people with questions and eye contact. Even though most shows do provide seating for exhibitors, always remain standing. This way you appear more approachable. Think about it this way… do you want to approach someone who is sitting down with their arms folded?

Now, here are the things you DO NOT want to do: It’s not the words you say, but the non-verbal communication that you do that leaves the largest impact and impression upon visitors. What are the ten pitfalls to avoid?

1. Don’t sit, read, smoke, eat, drink or chew gum in the booth.

2. Don’t use the cell phone in the booth.

3. Don’t gossip or badmouth competitors.

4. Don’t leave the booth unattended or leave without informing colleagues.

5. Don’t be late for booth duty.

6. Don’t use negative body language. Instead, smile and look at person when speaking. Use affirmative comments. Don’t close off conversation by crossing your arms. Remember, open hands promote honesty.

7. Don’t let the booth get cluttered, untidy and unorganized.

8. Don’t wear your badge on the left hand side. Instead, wear your badge on the right hand side so it can be seen by your visitor when shaking hands.

9. Don’t be unprofessional.

10. Don’t try to sell. Make appointments to call back or visit, and follow up immediately after the show.

So, what is the best way to maximize the leads you get?

  • Use pre-show promotions and invitations to your exhibit one to two weeks prior to the show. Studies show promotions can boost your lead counts by 33%.
  • Train booth staff to reiterate the benefits expressed in the pre-show promotion.
  • Engage in a 30-second dialogue of open-ended questions.
  • Determine what to present to this prospect within two minutes.
  • Present product(s) that benefit the prospect in a ten-minute timeframe.
  • In a minute’s time, complete your lead card or agree on the next step and move on.

Most importantly, make your leads matter! Have your booth staff fill out any lead generation card rather than the prospect or customer. This way you are sure to get all of the pertinent information as well as make a personal connection with that lead. It also gives the staff member a better opportunity to find out the exact needs of the prospect. 90% of all sales literature distributed at an event is discarded at the trade show, either by sales people or attendees themselves.

The success of a trade show is often measured by the number of leads created (especially qualified leads). However, trade show staff often forgets to get the visitor’s contact info or to indicate what products or services those visitors truly may or may not have an interest in. As a result you end up with either very few leads or unqualified leads that the sales team discards later.

Start Following Up On Leads BEFORE The Show Starts! So, before you leave the show, write (and, if not personalized, even print) the follow-up letter and prepare the follow-up packets. Be sure to have a stockpile of any brochures you may need, and if you’re going to promise to send anything after the show, be sure to have it already back in the office. Time is not on your side. Be prompt.

Good luck at your show! Wishing you success. The Factor Guru.

Tags: , ,

It’s All Bananas a guest blog by Darla Auchinachie

Jan 20

Posted by Darla in General Information | Comments off

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. 

Tags: , , , , , , ,

Plan Accordingly: We haven’t hit bottom yet

Jan 7

Posted by Gen Merritt in General Information | No Comments

After reviewing a prior blog, A Bumpy Ride: Plan Accordingly, Hold on Tight, I realized so much has happened since that time so long ago… yes, that whole less than six months ago. But, have we really planned accordingly? I don’t think many of us realized at the time just how bumpy this ride would be, especially for the factoring industry. Yes, for many factors a silver lining radiates from the economic cloud as new opportunities arise and as deal flow tends to increase during a recession. For some, however, tough times lie ahead with the ever changing credit markets expected to continue through much of 2009.

For one, what do factors typically rely most heavily upon when determining extending credit facilities to prospective clients? Their customers’ credit: the debtor credit. And, what is currently happening around us? Is there anything you read anymore without seeing businesses of all sizes filing for bankruptcy, restructuring or losing their financing lines? Probably not…

A recent article that came out on The Secured Lender’s email updates further expanded on this theme, focusing on certain industries.  Their take and others: we haven’t neared the bottom yet.

For a factoring company, continued vigilance on reviewing customer (debtor) credit must remain a priority. Further, special attention should be adhered in carefully looking at the underlying documentation supporting the sales made to these debtors (the receivables). If a debtor begins struggling with cash flow and a reason exists allowing for discounts, returns, credits or other offsets, then factors and their clients may begin experiencing more challenges in collecting on those receivables.  

Hence, the importance of sticking with the basics of factoring: continued focus on the debtor credit and underlying documentation supporting that sale.

Then two, it did happen; Prime went lower than LIBOR. But that’s not the big news. As Paula Cole sang, “Where have all the [lenders] gone?” After significant layoffs, even institutions such as Textron Financial Corporation ceased providing credit facilities to finance companies in late 2008. More and more banks and financial institutions are restructuring as well, causing a delayed effect on the small factor and their ability to finance their clients. And, what about the hedge funds who financed factors? Or, are we no longer allowed to talk about them… did they ever even exist?

With all these changes occurring, where is the factoring industry headed? Does anyone really know? Many factors with prudent monitoring procedures, a solid capital structure, and flexibility within their organization to contend with the new credit landscape will continue to grow, maybe even more during 2009 with the influx of new opportunities also resulting from the current credit market and conditions.  The question remains, however, have we really planned enough? Have you?

“A man who does not think and plan long ahead will find trouble right at his door.” ~ Confucius

Wishing you success through 2009. The Factor Guru.

Tags: , , , ,