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

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

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

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

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

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

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

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

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

Wishing you continued success. The Factor Guru.

The issue was whether to interpret certain contract clauses as eliminating a claim for fraudulent inducement. The facts are bad. The Plaintiff signed a lease with the Defendant to open a restaurant in Dallas. The Plaintiff signed a lease with the following clauses:

Representations. Tenant acknowledges that neither Landlord nor Landlord’s agents, employees or contractors have made any representation or promises with respect to the Site, the Shopping center or this Lease except as expressly set forth herein.

Entire Agreement. This lease constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and no subsequent amendment or agreement shall be binding upon either party unless it is signed by each party…

After opening the restaurant, the Plaintiff became aware of a foul odor that turned out to be sewer gas. The odor greatly affected Plaintiff’s business. Plaintiff was unable to remedy the problem, and had to close. Plaintiff then sued Defendant for a number of causes of action including fraudulently inducing them into signing the lease.

Before signing the lease, Defendant had made statements to Plaintiff that it was not aware of any problems with the space and that the space was in perfect condition. Plaintiff presented extensive evidence showing that Defendant was aware of the odor problem, but had concealed it from Plaintiff.  After considering the evidence, the trial court concluded that Defendant had lied and rendered judgment for the Plaintiff. The appellate court, however, reversed and found that the above clauses negated any reliance for fraudulent inducement. Plaintiff appealed to the Texas Supreme Court. The issue was whether the contract clauses prevented Plaintiff from being able to rely on Defendant’s untrue statements as a basis for a fraudulent inducement claim.

The dissent pointed out that the clauses explicitly state that there were no representations other than in the contract. There can be no statements for Plaintiff to rely on if the parties agreed in the contract that there were no other representations. If Plaintiff, who was represented by counsel, did not like the clauses, then it should not have agreed to them. As a result, Plaintiff should lose on its fraudulent inducement claim.

The majority of the Court, however, disagreed. They reasoned that the clauses did not expressly disclaim reliance. They just state that no representations were made other than are in the contract. Since the clauses did not disclaim reliance, Plaintiff wins.

The Italian Cowboy Partners opinion is a classic example of where the facts were so bad, that the Court felt compelled to find a remedy. Now, unfortunately, the law is less clear. The lesson is to be careful what you put in contracts when you are relying on someone else’s statements or someone is relying on your statements. Many of you negotiate your own intercreditor agreements. Be especially careful of the clauses in these agreements.

This article is not intended to render legal advice for any specific matters or situations. It is merely intended for informational purposes. You should contact your attorney for advice about any specific matters.

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.  He can be reached at 817/339-2474 or spierce@belaw.com.

Wishing you continued success. The Factor Guru.

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

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

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

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

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

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

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

Red Flag # 1:

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

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

Red Flag # 2:

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

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

Red Flag # 3:

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

Thank you for sharing your experience with our readers.

Wishing you all continued success. The Factor Guru.

Facts of the Case

In 2002, Jersey Tractor Trailer Training, Inc. entered into a loan agreement with Wawel Savings Bank for $315,000.  To secure the loan, Wawel took a blanket security agreement against all assets including inventory, equipment, accounts, instruments, documents, chattel paper and other rights to payment including general intangibles.  Wawel filed a UCC-1 on May 24, 2002.  Wawel put no restrictions on Jersey’s use of its accounts and the proceeds unless there was a default on the loan.

In 2003, Jersey entered into an agreement to factor its receivables with Yale Factors NJ, LLC.  According to the court, Yale never asked Jersey about any prior encumbrances and never reviewed Jersey’s books or records.  Dun and Bradstreet ran a lien search for Yale, but instead of using Jersey’s exact legal name, they left off “Inc.”  Because of this, Dun and Bradstreet did not find Wawel’s senior lien.  And, of course, the client concealed Wawel’s loan from Yale and concealed Yale’s factoring agreement from Wawel.  Yale filed their UCC-1 against all present and after acquired accounts in 2003.

Jersey continued having cash flow problems.  In December 2005, Wawel and Yale finally learned about each other and began litigation.  By April 2006, Jersey Tractor declared bankruptcy.  Yale and Wawel promptly filed an adversary proceeding in the bankruptcy court to determine who is entitled to the proceeds of all of Jersey’s accounts.  Yale argued that this case was an exception to first to file priority rule and that it should win over Wawel.

2007 Opinion

In 2007, after a two day trial, the bankruptcy court held that Wawel wins.  Yale argued that under New Jersey’s version of UCC 3-302, 9-330 and 9-331, it should have priority over Wawel to the proceeds because it was a holder in due course and purchaser for value of invoices.  For Yale to qualify for protection under either of these statutes, the court must find that the invoices are “instruments.”  The court must also find that Yale took the instruments in “good faith” which means that Yale observed “reasonable commercial standards of fair dealing.”  Although the court held that the invoices are instruments, the court denied Yale relief because Yale did not observe “reasonable commercial standards of fair dealing” when it entered into the factoring agreement because its due diligence was lacking and because it did not run the lien search using the exact corporate name of the debtor.

2008 Opinion

Yale appealed to the district court.  In 2008, the district court issued an opinion upholding the lower court’s ruling.  Wawel wins again.

2009 Opinion

Yale then appealed to the Third Circuit Court of Appeals.  In 2009, the Third Circuit affirmed most of the district court’s decision, but found that the bankruptcy court could not conclude that Yale’s lien search was commercially unreasonable as a matter of law just because it omitted “Inc.” from the name.  In fact, the Third Circuit Court seems to believe Yale’s search was commercially reasonable.  But instead of reversing the bankruptcy court, the Third Circuit sent the case back to the bankruptcy court to redetermine commercial reasonableness.  No one wins, but Yale gets another chance.

2010 Opinion

This year, the bankruptcy court issued a ruling in favor of Wawel . . . but for a different reason.  The bankruptcy court reconsidered the issue of whether an invoice is an “instrument” for purposes of 3-302, 9-330 and 9-331.  The court concluded that an invoice is merely a record of a transaction and not an instrument.  Yale Factors, therefore, cannot avail itself of any of the holder in due course or purchaser for value protections regardless of whether it acted with commercial reasonableness.  Yale attempts to argue that it was not just invoices, but also checks from account debtors that it purchased, therefore, the court should analyze whether these checks are instruments.  At trial, however, Yale never introduced any checks into evidence.  Without these checks, the bankruptcy court held that it cannot even begin to consider this issue.  Wawel wins again.

So what should we learn?  There are lots of lessons, but I want you to consider how much time and money these parties have spent litigating this issue.  Better due diligence and lien searches could have saved everyone a lot of time and money.  Or, to say it another way, an ounce of prevention is worth a pound of cure.

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 and has been a speaker with the International Factoring Association.  He can be reached at 817/339-2474 or spierce@belaw.com.

Wishing you continued success. The Factor Guru.

What is NFG?

For the past six months, we have been working on expanding our brokerage business, the Business Group of Brokers. We established The National Factoring Group as a separate entity and factoring brokerage website, designed to combine servicing the financial needs of the small and medium sized business owner with the exposure that the internet brings.

We wanted to present our collective prospective clients options that would make it easier to find you, the factoring company. We looked at factoring companies across the country and thought, “How can we present this information to the prospective client in the most organized and concise way, while still maintaining equality amongst these factoring companies?”

The website groups factors by the state (or states) in which direct representation exists, either by an operations’ center or business development office. To maintain an equal playing field, each factor then describes their range of services, niche features, and what makes them different. We believe that this strategy helps equalize local and national factoring companies amidst a competitive marketplace.

Through the website, business owners can educate themselves on factoring and determine which factoring company best meets their needs. The prospective client enters specific financing needs, industry information, and other data to help target an appropriate funder. Based on the preselected parameters by both the business owner and the factoring company, a set of matches are created.

What input does NFG have into choosing which factoring companies are sent information?

The National Factoring Group has no input into which factoring companies are chosen and does not see any client information until they are sent to the factor.  These emails occur simultaneously to the factor and to NFG.

Each factoring company is represented by certain aspects of their company such as their industries serviced, size range, and the way they describe their company.  Descriptions provided range from very simply saying, “Here is what I do…” to more in depth descriptions with a brief history of their company and why their clients stay their clients.

What makes NFG different than other brokerage businesses or websites?

The National Factoring Group strategy allows the prospective companies to decide. By inputting information about their business, their search results produce only factoring companies where a match would exist (i.e., size, demographics, other niche financing, etc). This process saves the company time in their search for financing.

More importantly, however, is that a portion of all commissions earned through NFG will go back into the factoring industry through advertising, articles, or other announcements that promote factoring for small and mid-size businesses.

Does the NFG select where to spend those funds?

Actually, no. We have set up an advisory board including factoring companies and other factoring professionals. These advisors will help to provide guidance on where these monies should be spent.

I often have people ask me if this is a website that is used to rate factoring companies in any way.

No, we do not rate the factoring companies. Every factor stands and is represented purely on what services they provide and how they choose to describe themselves. We do, however, have a code of conduct that requires all factoring companies to be honest in how they represent themselves to prospective clients.

Do factoring companies need to provide any information to NFG?

Yes.  Each factoring company provides an application or information package. This basic information focuses on their company, preferred industries, targeted size ranges, and other items. No reporting or confidential information is requested.

This application process is to ensure that the factoring company is represented appropriately to the businesses seeking factoring services. For an application, you can email me at brandi@nationalfactoringgroup.com.

What does a prospective company seeking factoring need to do?

The process for prospective clients is very simple. They provide general information about their company and their needs and select a local or national resource option. From there, they are presented with a matched list of factors that fit their company’s needs. The company can then read through some general information and select up to three factors that they would like to hear from directly. To complete their request, the company then completes more detailed information and the lead is then sent to the factoring company contacts listed.

In summary, it is also important to note that the funding transactions and relationships are directly between the factors and the clients. The role of the NFG is as a brokerage arrangement. For additional information on NFG, please contact Brandi Bauer at brandi@nationalfactoringgroup.com.

Wishing you continued success. The Factor Guru.

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

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

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

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

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

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

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

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

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

Wishing you continued success. The Factor Guru.

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

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

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

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

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

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

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

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

Wishing you success. The Factor Guru.

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

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

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

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

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

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

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

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

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

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

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

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

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

Wishing you success. The Factor Guru.

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.

While working with customers in foreign jurisdictions can generate substantial rewards, such trade also comes with great complexities that are uncommon in domestic transactions.  One must consider foreign credit, political, currency, extended payment term and legal enforcement risks before engaging in business abroad.  Despite the aforementioned challenges, the number one difficulty in cross border transactions is finding a lender who understands these risks, yet is still willing to provide the working capital needed to fund foreign transactions.  Cross border financing is often the key factor in growing or turning around an international business.

What are some of the common solutions for financing cross border transactions?

US banks often exclude international sales from the available borrowing base unless the client obtains credit insurance or working capital guaranty through the Export-Import Bank of the United States (Ex-Im) or through private insurance providers.  While each seems a viable option, each carries its own restrictions.  Although Ex-Im is designed to promote trade between the US and foreign countries, it has certain exclusions including, but not limited to, the suppliers’ locations and the buyers’ countries.  Another issue to consider with Ex-Im is the extensive underwriting process that may take months to obtain approval for a transaction.

Private credit insurance also has its downfalls.  Insurance providers help exporters extend competitive payment terms by protecting their foreign receivables against almost all non-payment risks.  Almost is the operative word here, as it is limited to political and insolvency risks.  It is important to remember that an insurance company can decline or reduce coverage at any time.

Both insurance options can prove costly and time consuming. Also important to note, is that if the insurance policy is cancelled, subsequently the loan will be as well, leaving nothing to show for the time and hard work obtaining this loan in the first place.

What are some of the most effective solutions for cross border financing?

Confirming, Forfaiting and Factoring are the most effective solutions for cross border financing.

Confirming is a financial service in which an independent financial entity offers to discount an export order in the seller’s country and makes payment for the goods.  For the exporter, confirming means that the entire export transaction from the manufacturing to the delivery stage is coordinated and paid for over time by the bank.  This type of financing is available in Europe, mainly in Spain, and has yet to be adopted in the US.

Forfaiting is the selling of long term promissory notes or negotiable instruments of the foreign buyer.  These instruments may also need to carry the guarantee of a foreign government or a highly rated bank.  Forfaiting is often used in medium and long term transactions and is normally very paperwork-intensive.

Factoring, another popular solution for cross border financing, is the discounting of a foreign account receivable and is used in short term financing.  In the factoring of foreign accounts receivable, the exporter sells its foreign accounts receivable to a factoring company for cash at a discount from the face value.  Factoring of foreign accounts receivables is less frequently used than factoring of domestic receivables.

Factoring of foreign accounts receivables is complex and only a few banks and firms have the knowledge to work with such complex asset classes. Factoring of foreign receivables requires extensive knowledge with foreign laws, advanced understanding of previously highlighted risks and building an effective platform to manage it all.

As the world opens its borders through the use of Internet, financing solutions for open trade continue to evolve.  My advice is to always seek a lender that is knowledgeable in foreign transactions and who can take your business to the next level.  Seek a lender who has experience in foreign markets, in all of its complexities and one who is willing to partner with you to achieve your goals while mitigating risks.

About the Author: Elizabeth L. Hastings is a Senior Vice President of Business Development at FGI Finance (www.fgifinance.com), global commercial finance group with offices in New York, Dallas, Chicago, and Los Angeles. Ms. Hastings sits on the board of the Dallas CFA.  She is a member of ACG, TMA, WFE, the Finance Forum, and the International Factoring Association. She can be reached at the Dallas office at 214.295.3216 or ehastings@fgifinance.com.