The other day, someone sent me samples of backup documentation to review for a new prospect. The client (a transportation carrier) had been with another factor prior and was still being financed by that factor. The good news, however, was that the potential new factoring company wanted to make sure they understood the ‘paper’ they were buying… before they actually bought it. They had questions. They didn’t want to assume. So, they asked.
As it would turn out, the paperwork for the invoices (i.e., invoice, rate confirmation and the bill of lading) indicated other carriers that had hauled the load, or they revealed loads were picked up… but not yet delivered. Strange I thought. However, during the initial verifications on the invoices, the calls with customers of the carrier (or account debtors) evidenced that the loads were real; however, the goods were still en route. What do you know? Would this be an incident of pre-billing?
More than likely… yes. Here’s the question though. What does this mean to the current factor? The only thing I could come up with that happens all the time: complacency. You know what I mean. That thing that happens over time when you become comfortable with a client relationship, you stop looking at all their paperwork, you don’t call as often on their invoices as you used to, etc. Complacency does happen.
Now is the time to look at those clients’ performance, and more importantly, to review the account management on those accounts — to review the processes and procedures in your portfolio. Typically, factors feel they know the ‘weaknesses’ in their portfolio already. They ‘watch’ those accounts ongoing. Yet, it is the client you know and love that sometimes has issues… causing financial challenges… and potential exposure and risk to the factor.
The current economic climate dictates vigilance. It requires relentless review of your portfolio. It doesn’t stop there: looking more at the invoices and backup documentation being reviewed, how the collection calls are going and how checks are coming into the lockbox can be critical. In this new financial environment, a good check and balance system should be in place, even an internal audit each quarter or a few times each year. Otherwise, how will you feel comfortable that your processes and procedures in place are being adhered to sufficiently?
How will you know complacency is not occurring? Several firms perform these services including Factor Source, Factor Help, and several other examination and auditing firms. Or, call the International Factoring Association for consultation and assistance. You can even have someone internally review these processes. This is not a sales opportunity but a mantra for looking at your portfolio… over and over and over again. I believe it was Keith Reid who said, “If you think fraud isn’t in your portfolio, then you just haven’t looked hard enough.”
Yes, these internal exercises may appear to be in vain and actually may result in nothing being found. (What a relief). And, yet, if you identify a potential concern before it transcends into a true problem… then, it is worth it, right?
Vigilance is the test for a factor. Yes, trust, by verify; however, maintain vigilance. Reduce complacency. Focus on not just sending money out the door but also getting the money back.
Wishing you success. The Factor Guru.