The Factor Guru

Tips on accounts receivable financing and business practices.

Posts Tagged accounts receivable finance

Warning Will Robinson: Proceed with Caution

Mar 6

Posted by Gen Merritt in Economy | Comments off

In 2008, the National average diesel fuel price peaked at over $4.70 in July. At that time, these rising diesel fuel prices occurred during a continued weakness in freight volume, which resulted in 2008 being one of the worst years in the transportation industry with minimal relief seen in 2009. In fact, over 3,000 trucking companies went out of business. Today, estimates project rising diesel fuel costs to be close to $4.00 by mid-2011 with a possible cumulative impact that extends into 2012 with prices again close to $5.00.

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.

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The Point of Verifications

Feb 21

Posted by Gen Merritt in Operations | Comments off

“Trust, but verify” was a signature phrase adopted by Ronald Reagan. Factors have also adopted this phrase ingraining it into their process. Verification of invoices is a key piece in how a factoring company confirms the validity of invoices and that those invoices will in fact be paid to the factor. Several years ago, the Commercial Factor published an article written by Allen Frederic on Verifications, the 5 W’s. This article is one I found that provides a good overview on this process and what is considered a verification, while also sharing some examples.

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.

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Using Technology to Stay Informed

Nov 29

Posted by Gen Merritt in Technology | Comments off

As I am sure you will be able to tell, this is a posting yet again on doing your research. That includes the Internet, not just UCCs, judgments and tax lien searches. Internet research is often overlooked, and I think I have figured out why. We all tend to just enter the name of a company in Google or wherever, and either, we get nothing or we end up with too many hits to filter through. Nothing relevant appears to come up in the search. Because of this, the value may seem lost. Why search on the Internet?

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.

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DON’T REJECT CONSTRUCTION FACTORING OPPORTUNITIES… a guest blog by Earl Harper

Oct 21

Posted by Gen Merritt in Sales and Marketing | Comments off

The unprecedented level of public works construction projects planned and currently underway throughout the U.S. means abundant opportunities for contractors and subs, many of whom are transitioning from purely commercial projects to the public sector for the first time and most of whom are undercapitalized. For most factors and asset-based lenders, factoring construction receivables is an anathema that they do not touch but this market provides promise that they should not pass up and there are several factors which have had a demonstrated success in transacting these deals.  So factors should think twice before they discard these income prospects or, at least, referrals should be made to factors specializing in construction deals to promote business relationships.  In all likelihood there are referral fees, participation opportunities and/or commissions to be made by the referring factor or broker.  And the recipient factor, in all likelihood, will return the favor with future business.

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.

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Who Is Representing Your Client Before the IRS (And Why You Should Care)? ~ a guest blog by Jason Peckham

Oct 1

Posted by admin in IRS Information | 1 Comment

Past due taxes and tax liens have been on the rise it seems… it is better to know now than to find out later. For those of you who have not talked to Tax Guard, I highly recommend it… they are able to monitor tax deposits and identify potential tax lien concerns before they arise. The days of tax lien searches and payroll tax reporting each month can now be decreased and/or eliminated. This new service has proven to be a definite ‘value add’ for many factors entering into new client transactions and for monitoring taxes and tax liens with existing clients.

Personally, I know many factoring companies using this service as part of their due diligence to ensure prospective clients are up to date on their payroll and other related taxes. Further, since Tax Guard provides an ongoing tax monitoring service, many factors are using this service to eliminate additional client reporting internally while still gaining the value of early detection for such taxes. Jason Peckham with Tax Guard has provided an article about how to address these past due taxes with your clients. However, if you are like me, you would just call them… it’s just that much easier…

Not all representatives are created equal.  Many do not work with the IRS Collections Division on a regular basis and the quality of representation can vary widely.  The client’s perspective as to the progress of negotiations with the IRS can differ substantially from the actual situation.

Upon learning of an issue with the IRS, the Factor should follow up with the client and representative, if applicable, to see if there is a legitimate plan in place to address the liability.  It is never safe to assume that everything is okay simply because the client has a representative.  The basic issues are simple – are your client and his/her representative effectively negotiating with the IRS and how am I (the Factor) affected?  The answers are not always clear.  However, by asking a few simple questions, the actual situation can begin to emerge.  There are some specific questions you should ask the client and/or the representative.

1. What is the strategy? Once the liability has been assessed by the IRS, it is a race to resolve the issue before the lien is filed and 45 days pass.  There is no time for learning on the fly or exploring how the IRS Collections Division works through trial and error.

Typically, the best strategy to protect the client / taxpayer and the Factor is an Installment Agreement in conjunction with a request for Subordination of Federal Tax Lien (subordination).  The IRS cannot take enforced collection (levies) while a proposal for an Installment Agreement is “pending,” an Installment Agreement is in good standing, or for thirty days after an Installment Agreement has formally defaulted.  Additionally, a subordination can only be issued if there is a formal Installment Agreement in place.

2.  Have financial statements been prepared and sent to the IRS? Almost every resolution strategy with the IRS (except for personal liabilities less than $25,000 or business liabilities less than $10,000) requires completion of two financial statements – forms 433-B (business) and 433-A (personal).  The Automated Collection System or Revenue Officer (the two arms of the IRS Collections Division) will use these forms to determine an “appropriate” resolution.

A taxpayer gets one chance to make a first impression with the IRS.  It is important that the 433-B and 433-A accurately reflect the taxpayer’s actual ability to pay.  A list of assets without corresponding encumbrances or an income and expense analysis that demonstrates the taxpayer can afford more than the requested payment (or cannot afford a payment at all) will likely result in rejection of the proposal and substantially delay the process.  If the representative submits poorly prepared forms, the 45 days will likely pass without a resolution (the time will be spent trying to provide support/clarification of the financial information provided), which means the Factor will have to cease funding.

3. Will a proposal be submitted with the financial statements? Too many representatives (inexperienced or otherwise) submit financial statements to the IRS without a formal proposal.  The IRS can use the information provided on the 433-B to levy the taxpayer’s bank accounts and accounts receivable.  A proposal is necessary to facilitate a resolution and protect the taxpayer and Factor from levy (the IRS cannot levy so long as there is a “pending” Installment Agreement).

4.  How am I (the Factor) protected? Generally, there are several ways to address an IRS liability.  The existence of a factoring relationship severely limits those options because of the federal tax lien and its impact 45 days after it is filed.  Don’t assume that your client’s representative is aware of the factoring relationship. In many cases, the client will fail to disclose important information to the representative.  If the representative is unaware of the factoring relationship, a strategy could easily be pursued that does not take into consideration the Factor’s issues and concerns.  Additionally, don’t assume that the representative knows how to quickly address these issues. Many representatives address issues with the IRS in a reactive rather than proactive manner.  It is much less likely that a local representative who only occasionally works with the Collections Division of the IRS will be familiar with factoring and the implications of an IRS liability on Factors.  Finally, keep in mind that a representative answers to the client, not to the Factor (unless other arrangements have been made).

Making assumptions is generally not advisable.  This is especially true when the IRS is involved.  By taking a few minutes to speak with your client’s representative, you can verify that your concerns are being addressed as well as protect your client’s business from a less than helpful representative.

For additional information on Tax Guard, please contact Jason Peckham, Director of Business Development, (800) 880.7318, Email: jpeckham@tax-guard.com.

Wishing you continued success. The Factor Guru.

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Why We Do What We Do ~ a guest blog by Brandon Bauer

Sep 8

Posted by admin in Sales and Marketing | Comments off

Finally, after a year, I have a story to share with all of you.  I have worked in the factoring industry for over a decade and have loved almost every minute of it.  I could have done with fewer workouts or without the heartbreak that comes with those companies that did not survive.  Fortunately, there are many more good memories than bad.  For my money, nothing makes me feel better than knowing you helped a business make payroll, keep their doors open, and retain their valuable employees.  Like many of you, this is why I don’t mind getting up a little earlier in the morning, or working later into the evening.

In April, after being a factor all of these years, I set out to start a brokerage company.  This experience has given me a different perspective, as now I am helping businesses in various areas of financing while also working more closely with companies that were once my competitors.  This new perspective also has reaffirmed what I already knew: factors are definitely doing business and helping our economy.

The economy has, however, changed. Sadly, not all small and mid-sized companies have changed quickly enough to save their businesses.  These small to medium sized businesses and start ups are what will help rebuild our economy.  For many of them, factoring is the best way, or the only way, for them to maintain their cash flow.  Since there are a variety of factoring companies within different markets, industries, niches, size ranges, etc., I can now introduce my clients to the factor that best suits their needs and their situation, thereby being able to say ‘Yes’ a lot more. Being able to say ‘Yes’ allows me to make a greater impact in the small and mid-sized market.

After all, factoring is the lifeblood of many of these small and medium sized businesses; it enables these companies to grow and saves many businesses that have been hit hard by the economy.  With factoring, business owners and their businesses are also able to purchase more inventories, accept more orders and jobs, pay vendors on time, and hire new employees.  This trickles down allowing their vendors to do the same.  By helping one company, we are helping many. We are all helping to rebuild the economy.

During these past months, I have rediscovered the joy of factoring.  Recently, I was able to help a company that was struggling to find a way to make payroll at the end of the week.  With the funding provided through a factoring facility, twelve families did not have to worry about how they were going to put food on the table.  Our client was so happy, he cried. To me, that is worth all the early mornings and late nights.

While I don’t know if this is the nature of what my article was supposed to be, I felt it was important to share these thoughts and to say to all the factors and their dedicated teams, “Keep up the good work.”  You have a direct impact on the people and companies with which you interact. You are doing more good than some may realize. Thank you.

The Business Group of Brokers, LLC was created to provide a multitude of alternative financing options, utilizing the strengths of different finance companies to make sure clients find the best financial match for their specific needs. Businesses benefit from expertise and years of experience in helping them find the working capital needed to grow and expand their company.  Since every finance company and their clients are unique, The Business Group of Brokers strives for complete satisfaction on both sides of the transaction and plays an intricate role in creating a good match for the financier as well as for the company. To find out more, visit www.mybgb.com.

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Keeping Your Old Friends

Aug 31

Posted by Gen Merritt in Sales and Marketing | 2 Comments

We all have a tendency to focus on new business. Did you see that commercial from Ally Bank? A friend of mine sent me this commercial. It got me thinking… Sometimes, it is more about the customers you already have… the ones who have stayed with you, appreciated the benefits your products provide them and their business, the ones who have chosen you over others: your old friends.

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.

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Clients’ Failure to Pay State Franchise Taxes is Risky Business for Factors! A guest blog by Scot Pierce

Jun 15

Posted by admin in Operations | Comments off

Factors need to be aware whether their clients are in good standing with the states where the clients conduct business.  Most entities doing business in a particular state are required to pay state franchise taxes.  Paying the taxes helps maintain an entity’s legal standing to do business in the state.  Failure to pay, however, ultimately leads to tax forfeitures which can be a big problem for factors.

Tax forfeitures affect an entity’s liability protection.  You are all familiar with the various entity forms.  You know that some entity forms provide limited liability for owners, shareholders and partners.  These include limited liability companies, S corporations, C corporations, limited liability partnerships, and professions corporations.  You also know that sole proprietorships, general partnerships, joint ventures and DBAs have no limit on liability.  Entities can lose their liability protection by failing to pay state franchise taxes.

Using Texas as an example, entities have three levels of standing.  They are (1) “Good Standing,” (2) “Not in Good Standing,” (3) and ‘Temporary Good Standing.”  Most states have the same or similar designations.  “Good Standing” means the entity has filed all franchise tax reports and paid its franchise taxes in full.  This allows the entity to continue doing business in the state.  “Temporary Good Standing” is really no reflection on the entity itself.  This simply means that the state has not yet processed the franchise tax reports. Until it does, all entities are granted temporary good standing.

“Not in Good Standing,” however, is very different. “Not in Good Standing” is a red flag for factors.  It means that the entity has not paid its state franchise taxes and has, therefore, forfeited its right to do business in Texas.  In practical terms, this means the entity is now operating as an assumed name or DBA so any shareholders, owners or partners are not protected personally from liability for debts incurred while the entity was “Not in Good Standing.”  Or, to be more direct, you are now factoring a sole proprietorship or general partnership.  My experience is that this not only can affect how you factor the client and perfect your security interest, but it is also a red flag that you may very well be factoring into a liquidation.

Because of the effect of failure to pay state franchise taxes, I recommend factors be vigilant in checking this.  Usually, the state comptroller’s office will have this information.  If you have a client whose account status changes for the worse, you should immediately contact the client to learn why this has happened and whether the client intends to correct the problem.  This may allow you to catch a failing business early on and take appropriate steps to protect yourself. Or, it may allow you to avoid factoring a business that just wants your money while intending to file for bankruptcy protection. The bottom line is factoring a client who is not paying its state franchise taxes can be a recipe for disaster.

About the author:

Scot Pierce is a partner with the lawfirm of Bracket & Ellis, P.C. located in Fort Worth, Texas.  He has represented a number of factors with commercial litigation and bankruptcy issues.  He also regularly writes articles and presents speeches on creditor issues, including an upcoming teleconference on Issues to Consider when Litigating against Account Debtors.  He can be reached at 817/339-2474 or spierce@belaw.com.

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Who is Hammurabi: A Brief History of Factoring

May 5

Posted by Gen Merritt in General Information | Comments off

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.

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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 | 1 Comment

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.

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