The Factor Guru

Tips on accounts receivable financing and business practices.

Posts Tagged accounts receivable finance

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.

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A Look Back and Ahead

Mar 3

Posted by Gen Merritt in Operations | 1 Comment

2009 was a tough year. That is all I hear. For the existing portfolios, revenues were down for the most part last year; some publications have noted a 20% to 40% downturn last year resulting from the economic decline. Note that much of this may be dependent on the industry in which a factor may have a niche. Factors have been increasing their monitoring procedures to stay more in tune with their clients’ businesses and collateral performance. More research and credit limit adherence is being required for debtor credit. Think about what it says when bankruptcies increased 25% to 50% over 2008; tax lien filings increased over 25% from the prior year.

For new business, many of us have looked at more and more prospects to ultimately only fund the same number of deals. Issues arising from the economy last year have spurred additional due diligence and research on these prospective clients to ensure a long standing relationship will exist, or can exist in the first place. The question that always comes to mind: can you get out tomorrow?

So, where does that leave 2010? Well, we are well into the first quarter and business opportunities have been increasing, provided you have the capital available… but that is another discussion for another day.

By now, you hopefully have already evaluated your portfolios to determine areas of potential loss and/or weakness. You have also by now identified areas of improvement in your operations and portfolio management to help ensure proper checks and balances internally. For an extreme example, does your account manager handle the verifications, daily fundings, collections, and payment application for their clients? How would you know if something arose that should be a red flag? Maintaining appropriate checks and balances can be critical in today’s environment. Establishing certain communication protocols both internally and externally can prove to be invaluable within an operations department.

The recent increase in deal flow should, however, not equate to reducing the recently increased monitoring and account management standards. This year will be just as challenging for many as last year. Time and time again, I hear that factors are going back to the basics: maintaining verification and collection efforts, monitoring collateral trends in purchases and cash  management, reviewing and adhering to debtor credit limits, and understanding the billing of the client and what they do (i.e., industry in which they operate, etc). Factors are also paying more attention to early warning signs that may be indicators for potential concerns.

All I can say is be prepared… be proactive and not reactive, as they say. Surprises are not always a good thing.

Wishing You Continued Success. The Factor Guru.

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Purchase Order Financing a guest blog by Richard Eitelberg

Nov 21

Posted by admin in Sales and Marketing | No Comments

WHY PURCHASE ORDER FINANCING AND LETTERS OF CREDIT HAVE BECOME SAINTS AMIDST THE EVILS OF “THE GREAT RECESSION”

BY RICHARD EITELBERG, CPA, FOUNDER-PRESIDENT OF HARTSKO FINANCIAL SERVICES, LLC, A SEVEN-YEAR-OLD PURCHASE ORDER FINANCE FIRM WHICH HANDLES ABOUT $150M IN ANNUAL TRANSACTIONS, BASED IN BAYSIDE, NEW YORK (WWW.HARTSKO.COM)

e9dc31192f4c8656“The Great Recession” has left a lot of asset-based lenders and factors weak and lame.  Their inability during this period to access credit lines from banks, hedge funds, and equity investors often means they must restrict money to existing customers or refuse prospective clients.

Purchase Order Financing and Letters Of Credit generally looked upon as a last-resort bitter pill have seen increased acceptance as a way for a business owner to preserve a transaction opportunity.  With up front honesty, PF is expensive because of the very high risk issues involved and the intensive servicing requirements.  However, if a deal has the potential to yield a 30% profit or more—why should the business owner be concerned about sacrificing a few more percentage points over and above a traditional lender?  Is losing the opportunity to do the deal altogether, a better alternative?

Factors and asset-based lenders should realize that if they are at the end of their line with their client, referring the PF route can keep their relationship and income opportunity alive.  PF is a fast way for their client to secure funds needed to fulfill customer purchase orders and expand their business without giving up equity or trying to borrow additional funds (an option which no longer exists).

Here’s the process:

1.   The customer submits a purchase order to the client with all documents

2.   The client submits the customer purchase order to the PO financier for approval with all costs associated with transactions

3.   The PO financier will then will make direct payments to the client’s vendors so that the merchandise for the customer PO can be produced

4.   The client’s vendors deliver final product directly to the end customer or to a third party warehouse until shipped to end customer

5.   The seller then invoices the shipment and sends invoice and corresponding copy of customer PO to the factor

6.   The factor funds the invoice at his discount, paying the PO financier their loan plus fee

7.   The factor (or bank) collects from the end customer and pays the client their residual left from the advance

PF is taking a piece of equity in a client’s deal on a temporary basis, perhaps, thirty, sixty, ninety days, or 120 days.  A PF firm earns a fee on a precise part of the deal.  The PF firm doesn’t really “lend” a business money.  Most times, PF firms do not actually give a business any money or hard cash.  The PF firm’s money and equity backs up and supports the integrity of said purchase order.  It makes transactions work by opening up an LC usually overseas to procure merchandise, products, and materials for businesses.  (Or, wires are sent to domestic manufacturers to make purchases in behalf of businesses.)

PF is only transactional and temporary with the money going to fund the goods or merchandise in that specific transaction.  PF funds are not allocated to fund payroll, rents, cars, or any other business operations. Therefore, PF enables start-up companies to grow and troubled companies to survive.  Even bankrupt companies are generally able to access PF because the fees are guaranteed by the court.

Finally, in terms of the relationship, PF firms are not offended that a business owner may use this process one day, while returning to the factor or traditional lender the next day.  The PF community recognizes that PF is only going to be used when it is absolutely necessary and all other lender options have been exhausted.  The PF firm accepts that business owners and their lenders will only use it when they need it!

For more information on purchase order financing, feel free to visit www.Hartsko.com, or contact the IFA directly.

More about the author.

IMG_1009Richard Eitelberg is the Founder, President of Hartsko Financial Services, LLC., with offices in Bayside, New York and Deerfield, Illinois.  Mr. Eitelberg, was graduated from Michigan State University with a BA in Accounting.  He earned his license in certified public accounting (New York State).

Mr. Eitelberg has been the Chief Financial Officer for two garment industry companies: Adrian Landau Designs, and B. Lucid.  He was a Senior Auditor for Josephson, Luxemborg & Kantz, CPA’s, PC. He began Hartsko about seven years ago, assembling a group of private equity investors.  Today, Hartsko handles purchase order financing and letters of credit with some $150m in annual outstandings. (www.hartsko.com)

Mr. Eitelberg, a resident of Plainview, New York is a member of the Commercial Finance Association, the International Factoring Association (preferred vendor) and the Turnaround Management Association.

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No Horror Stories Here… a guest blog by Darla Auchinachie

Sep 12

Posted by Darla in Sales and Marketing | Comments off

halloweenAs the aisles in the retail stores remind me, Halloween is just around the corner.  I just received an invite to a friend’s annual costume party in Phoenix – this year the theme is Mel Brook’s movies; it will be fun to decide what to wear to that!  To be honest, Halloween isn’t my favorite hallmark holiday – you see my birthday is in October – and throughout my childhood my mother thought it was “cute” to have a witch, ghost, goblin themed or (insert wacky Halloween reference here) themed birthday party for me.  What if I didn’t care for spiders or skeletons?  Well, it just didn’t matter – moms will be moms… enough said. Even though October is generally the “scariest” month of the year with haunted houses and jack-o-lanterns dotting the landscape, I’m in the mood to shine a good light on factoring…

This has been an amazing year so far for factors. I say amazing, but I could probably come up with dozens of adjectives and each would be fitting.  Words like challenging, tough, and busy come to mind too.  This year is different though; I have observed something markedly different than in all my history in this business, which is the huge amount of exposure our industry has enjoyed.  Never before has the word “factoring” appeared so many times in news searches on the internet.  Sometimes the stories are good, you know the ones where factoring is seen as a positive form of finance – other times the stories aren’t so great, like fraud occurring either within a factor’s portfolio or those rogue entities that raise money ostensibly for the purpose of purchasing receivables to only use the funds for anything but factoring.  CIT’s troubles alone have brought factoring into the limelight.  While I truly wish the best for that company and who knows how that will all end up, I suppose I am grateful that more and more of the population has heard of factoring just from reading about CIT in the news.

I have the pleasure of working with multiple factoring companies on a variety of projects – and in so doing have gained a very unique perspective on the state of the industry today – guess what, there are many new deals being booked daily all over the place!  Those factors who have strong underwriting and portfolio management standards as well as their own capital and access to liquidity are finally able to grow their client base simply because other forms of finance are not available.  On the other hand, there are factoring companies who struggle with access to liquidity and declining sales volumes because their client’s sales have decreased.  There are also start up factoring companies opening all over the country as they see factoring as a good business to be in – as long as those folks are seeking out education and assistance and respect established standards, they should be able to do well.  Unless every single factor I’ve been talking to is fibbing, they’ve all been busy putting on new deals – and don’t see their pipeline dwindling any time soon.  Nope, no horror stories here.

A factoring company (just like any other business) wants to make a profit at the end of the day.  This is no easy task when you consider the amount of overhead it takes to run a factoring operation.  Salaries, Credit Expense, Cost of Funds, Rent, Due Diligence Expense, Lock-Box Fees are just a few of the expenditures a factor has.  The smart ones also put a little away each month to build up a loss reserve should the inevitable occur.  To the average person on the street, when they see what a factoring arrangement is priced at, may feel it is exorbitantly high, but when you take away the actual costs to provide this service, you’d be surprised at how little of those fees actually make it to the bottom line.

All that being said – factors have to charge what they charge because factoring is labor intensive and expensive to operate.  If the factor just purchased invoices and advanced funds, they would be out of business very quickly – that translates into fewer companies providing this critical form of finance – not a good thing for the general business environment.   That would be a horror story.

I think that many factoring companies (at least those that I deal with and talk to routinely) are in this business both to make a little profit and because it’s rewarding to help companies survive by providing working capital.  No one I know is in the business of gouging their client base. Moreover, it takes effort to find a client, to perform due diligence confirming the factor can make a difference for that company and then to bring the client on board to provide financing.  We all strive at that point to keep the client active for as long as possible – the average being 18-24 months.  I recently spoke to the head of a factoring company that said they’ve been able to keep their average client to up to 30 months!

Factors actually work hard at the collection process to help keep receivables turning so that the costs of factoring remains as low as possible for their clients.  These aren’t heavy handed collection tactics, merely good old fashioned solid receivables management techniques.  The result is that the client also maintains a healthy bottom line.  Client’s who grow or mature enough to be able to qualify for bank financing make this all a win-win situation.

When I hear of “client horror stories,” I am disheartened by the hyperbole.  I guess I come from the side of the fence that a client horror story is one wherein the client  figured out the perfect fraud and then absconded with big piles o’ cash.    While there is press that suggests that factoring companies are Good, Bad or Evil – these are all emotional terms – working capital shouldn’t be emotional.

If a business needs a factor they can look to any number of resources to find the best arrangement possible.  Price and Structure should not be the only deciding factors (pun intended).  One company may offer a low rate but then require monthly minimums and a term of one year, while the next company may offer a higher rate with an easy out and no minimums.  Some companies even offer programs that adjust with the client’s sales volume.  If you spend the time to understand the differences, you’ll probably find that in the end most offers are relatively equal in costs (plus or minus some basis points).  So if all terms are equal, what can a business seeking a funding source do?

The answer: get to know the factoring company. Ask for client references, and then… actually call them.  Does the factor have a history of taking care of their clients?  How long does the average client stay with the factor?  Is it only three months?  Or is it two years?  What other services does the factor provide? Same day funding on schedules received by noon or does funding take 48 hours or more (routine funding not the initial funding)?  Does the factor understand your business?  How well do you relate/communicate with representatives of the factoring company?  Is the company secure – do you think they will be there when you need them?  Are they in the same time zone as you, and if not does it make a difference (to some it might – to others it won’t).  Are you working directly with a funding source or through a broker?  How do you know the broker is really looking at the best deal for you?  There are so many other issues besides price alone!  If sales volumes can be maintained, maybe the smaller fee with minimums is the way to go. If not, then the higher priced deal may look more attractive.

If I go back to how I started this article, I was shopping… so, look at it this way, when you buy a plain white shirt from a low cost retailer, you probably don’t expect for the shirt to last very long – seams unravel, it gets stretched out, etc…  Buying a similar shirt from a more expensive retailer probably means the shirt will cost more, but the stitching will be different and the fabric might be stronger, and generally speaking, that shirt ought to be in your wardrobe for much longer than the less expensive one.  Which do you buy?  That’s a personal decision. For me, I’d spend extra just to know I would have something of quality… something that would last.

One more thing, you know that factor that quotes a lower rate but then imposes minimum volumes – well, I’ll be willing to bet that can be negotiated.  The negotiation however probably won’t be that the factor will maintain the same low rate without minimums – they simply can’t afford to do business this way.  In order for any transaction to work, it has to benefit all parties – everyone needs to “win.”

It’s a shame when clients don’t fully understand what they’ve signed up for though.  I was taught early on to never sign something that I either didn’t understand or didn’t agree with.  I make it a matter of practice to fully read any document I need to execute and if something isn’t clear to me, then it’s my duty to learn more before signing, and that’s just personally.  Shouldn’t a business owner follow the same rule?  Imagine signing a three year lease and then three months into the lease deciding that you no longer wish to rent the space.  There will be penalties from the landlord to break that lease, why should factoring be any different?

So, I don’t have any horror stories, even though Halloween is near.  Factoring works because those providing the capital know what needs to be done in order to protect that capital, and clients understand that having access to that capital comes with a price. Clients need to look at their business critically to determine if factoring works for them or not.  The business that has very low margins probably shouldn’t factor; the businesses that have some room to absorb the costs of factoring almost always benefit by having the working capital to sustain and grow their operations.  Most factoring companies probably have tons of success stories, and even those that do will have experienced a relationship that did not end well.

I think it’s up to us as an industry to maintain how positive factoring arrangements can be for everyone – not just the factor and not just the client.  This is the business we’ve all chosen to be in and I’m proud to be a member of this community.  I don’t want to dwell on situations that I’m not directly involved in, and I try not to lay blame when the facts aren’t public.  I’d rather shout out that factors are here to serve the businesses that need our funding, and we’ve got the capital to be able to help.

Let’s all take advantage of these current economic times by continually promoting that factoring is a great form of finance!  Lift up our industry for the greater good.

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FAQs: Transportation Qualification

Jul 7

Posted by Gen Merritt in Sales and Marketing | No Comments

I noticed when I returned from vacation there were several questions on transportation factoring. One of them stuck with me: What are some questions I should ask a small trucking company to help qualify them for factoring? Below are some questions you may want to consider:

* Tell me about your business. How long has the business been around? What did you do before starting this business? Hints: This conversation may also help establish the type of monitoring that would be involved with the account.

* How many trucks are you running? Depending on the type of loads being hauled, trucks may typically carry from $8,000 to $12,000 a month in loads; loads hauled generally do not exceed $15,000 a month per truck unless the company operates in a unique niche of the marketplace, provides heavy hauling, etc.

* Are you hauling full loads or LTL (less than a truckload)? Hints: LTL means smaller invoices and more paperwork; risk is spread among many invoices and customers which helps diversify the risk profile while also creating additional work in the account management.

* Where do you get your loads? Do you have steady customers or do you get loads from load boards? Hint: if all loads come off the web, the client may struggle maintaining business profitably as these loads tend to be lower paying.

* Who are your major customers (i.e., shippers, brokers, names of companies, etc.)? How many customers do you have? How many of them are repeat customers? How do your customers typically pay? Hints: if the customers pay very slowly, then your fees will be higher; the client may not be able to afford factoring. Trucking industry receivables tend to pay in less than 45 days. These questions will also give you an idea of how much time an account will take for notification, verification and collection purposes.

* What is your typical invoice size? Hints: there is no “typical” but get a range from low to high. However, unless a trucking company is doing heavy hauling loads, they should not have large dollar invoices (i.e., $5,000).

* What is your current billing process? How does it work? Can you walk me through what you typically do to get your customers their invoices and how long that process takes?

* Do you have any special arrangements with any customers on advances for fuel, quick payment terms, or anything else?

* Do you have a line of credit at the bank now? Hint: if yes, then a bank take out may be in order or subordination on the receivables.

* Do you have employees? Hint: if yes, the client should be current with payroll taxes and other obligations. The client may use owner operators as well. If so, how many; are they always the same drivers or different ones each time, etc.? This may also reveal whether the company is brokering loads to other carriers.

* Is the company profitable now? Hint: if they have a reasonable profit margin, the client should easily be able to afford factoring.

* What about 2290 (heavy vehicle highway use) taxes? Do you have these? Are they paid currently? Hint: remember that these taxes are due annually and have the same priority on factors and lenders as payroll taxes.

The list of questions can go on and will expand based upon the company’s answers. Understanding their business, the collectibility of the invoices, and your risk-reward profile will help you better structure a transaction. Feel free to add more by commenting to this post.

Wishing You Continued Success. The Factor Guru.

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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.

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Perception is not always reality: factoring may be the answer

Feb 4

Posted by Gen Merritt in Sales and Marketing | Comments off

 

I have a family member who believed a common misconception that I have always been involved in a sub-prime, “loan shark” type of business: factoring. No matter how many times I attempted to discuss how factoring works and how it benefited a small business, they just would not listen. Their theory focused on, “Why can’t the company just go to a bank?” and “That is just too expensive.”

Have they looked around at the banking environment lately?

Well, recently I was discussing a transaction that was funded by a factoring company I know. It was a small business that works with government entities (i.e., state and city municipalities) that recently experienced a massive increase in growth, or had the potential too… they just needed working capital. The company did have a line of credit; however, the bank was unable to raise their current facility to the level the company needed, as the company’s historical sales and cash flow would not justify this increase. However, by factoring their receivables, the company could accept these new orders and grow their business. The perceived ‘strain’ and ‘expense’ of factoring was immediately offset by the ability to expand the business and ultimately create more profitability.

This ‘family member’ overheard the conversation and began asking questions about how it worked, the structure, the credit guidelines, and how the factoring company would be repaid if the customers of the client did not pay.

Yes, the fees are more than a traditional bank source; however, we walked through an example of the overall impact to a business that would now be able to grow from factoring its receivables. It was then, that light bulb moment, that they realized the potential gain in income and profitability by using factoring versus continuing with the business without this working capital arrangement.

Using only generalities, they finally said (in amazement), “I didn’t know that factoring could help a company like this?” Yes, I too was shocked and amazed as they say.

Hadn’t we already talked about this? Sometimes, though, real examples help explain a transaction better. Moreover, showing the value added from factoring receivables and the potential financial gain and impact on a company’s bottom line can be a revelation.

So, once again, I had to sit back and evaluate what had just transpired. Perception in this case was not the reality. It was just a distortion of what people had ‘heard’ and a misperception of factoring itself. Sometimes, factoring accounts receivable can be the answer to the growth of a small business.

Wishing you continued success. The Factor Guru.

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The Swiss Cheese Theory

Nov 4

Posted by Gen Merritt in Underwriting | Comments off

Why do some deals make it and others don’t, even when they have similar characteristics? Even when you go through the company background, the receivable base and performance, financial trends and sometimes the background and credit of the guarantor, in some cases, a prospect may not fit into your box. Why?

Well, this can be attributed to just a deal that doesn’t fit within a factoring company’s target client profile. It may, however, be perfect for another factoring company based upon their niche, risk profile, or other criteria.

One other reason may be because too many holes exist. What does this mean?

Someone (I believe it was Michael Haddad, Core Business Credit) told me once that when you mitigate too many risks in a transaction… it’s like a block of Swiss cheese. There are too many holes without enough cheese holding it all together. I know… sounds weird but the analogy stuck.

Since factoring is more of an art, I think this Swiss cheese theory helps explain why.

So, what are the holes? Many look at the six Cs of credit when reviewing a prospective client transaction. I tend to break it down to four key areas instead (as I can never remember the other two as everyone seems to have a different other two): Character, Collateral, and Credit, along with Common Sense of course.

You may ask why Character first? The person running the business who has the relationship with the customers can be critical when reviewing a new transaction. How they manage their personal finances may be indicative of how they manage their business and, ultimately, how they may work with their factor or lender during challenging financial times.

Collateral remains the foundation of factoring. Some important questions to think about: Who does the company sell to (what types of customers)? How is the customer credit? What type of industry does the company operate in and what current trends are ongoing in that industry that may affect the collateral? Do concentrations exist? What does the aging reflect about aged invoices or credits? How does the company bill? When is an invoice considered accepted by the company’s customers?

The third element, Credit, can include customer credit; however, what about the credit of the company? What do their financial statements show? What is going on in the business? What is their margin and does it support the factoring expense? Are there any entries or trends that require additional explanation? Remember, reviewing one period of time only provides a snapshot; however, having prior financial statements to compare against may help show trends in the business.

Finally, Common Sense is a must. This is the key element that brings all the other pieces together. Does the information reviewed correspond to the discussions held to date? Are there any areas that remain unclear or are conflicting with the information reviewed? Have the holes been mitigated in a way that would result in a successful collection, should the need arise? Is there enough cheese… or, are there too many holes?

Wishing you success. The Factor Guru

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Measuring Results

Sep 23

Posted by Gen Merritt in Collections, General Information, IRS Information, Sales and Marketing | No Comments

Yes, we had several questions this week on payroll tax monitoring, 8821 forms with the IRS and past due taxes, along with IRS tax liens. In all cases, we are happy to provide our experience; however, you should also consult your legal counsel or a CPA to insure you are protected. We’ll save this for another time. If you have questions in the interim, you can email us directly. (A link has been added for this form so you can use this now, if you are not already). Note this was updated in August 2008.

What I wanted to talk about in this entry was planning and measuring performance. Do you have the ability to measure productivity… performance… results? How do you know that the processes you thought you established are truly being followed? What tools and management do you have in place? (This works in any business – not just factoring).

Have you ever wondered why marketing/salespeople bring in a lot of leads but minimal results? Have you ever wondered why a collections staff can call on aging invoices all day but with limited success? Some would say it’s a numbers game in both cases. I respectfully would disagree.

Sales can be a numbers game, but wouldn’t it be better to identify who your salespeople are calling on, what they are saying, what they know about the product they are selling? Is it just the features? Or, do they know what the true benefits (and challenges) are for a prospective client? Can they outline those benefits to a prospective client to add value to any new customer? Can they breakdown a good lead from a ‘not a good fit’ lead?

Likewise, in collections, do your collectors just call to identify the status of a payment without understanding what they are calling on exactly? Do they follow up promptly? Is the reason they are calling because of an internal issue in either your company or your client’s company?

In both cases, you will notice, ‘understanding’ is required and needed to produce efficiency in efforts and to maximize the value of your organization.

Although I have lots of ideas about both — I more or less want to pose the question to readers for them to think about their operation, their company, and ultimately their success.

Wishing you success… the Factor Guru.

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