The Factor Guru

Tips on accounts receivable financing and business practices.

Posts Tagged gen merritt

FAQs: Advance Rates, Dilution and Chargebacks

Jun 2

Posted by Gen Merritt in General Information | 2 Comments

The Advance Rate and Dilution:
What is this term and why is it different on some clients? Some are 90% while others are 75%?

The amount that can be advanced to a client is generally expressed as a percentage, called the Advance Rate. Typically, this is calculated as a function of Dilution (which is the percentage of an invoice that is not returned or paid). Dilution includes discounts, returns, allowances or any reason an invoice is not paid in full. Many factors will use a multiple of Dilution (3x or 4x) to establish the Advance Rate; other factors typically just add 10% to the dilution.

Tip: You may hear or see on factoring reports the words Chargeback, Recourse, or Adjustment… these are all dilutive items.

For illustration purposes, if a client sells $10,000 in widgets to their customer and a factor advances 80%, the client would receive $8,000. Then, when the customer (debtor) pays for the products, let’s assume they only pay $7,500 claiming they had a credit on file for $2,500. Therefore, they do not pay the full amount of the invoice. The portion that is not paid is considered dilutive, or Dilution. Of the $8,000 the factor sent to the client, only $7,500 was received. The factor would still be owed $500 plus any factoring fees.

It is because of this that setting an appropriate Advance Rate is important, as well as monitoring the client’s ongoing Dilution. This also highlights why during verifications and collections factors will inquire as to open credits, other potential offsets, discounts, disputes, etc.

Chargebacks / Dilution:

Did you know that many recourse factors may ignore chargebacks after recourse to a client. For example, if an invoice hits 90 days, they may just charge it back to the client without wondering or asking Why? Since the invoices purchased should include services that are completed or goods that have been delivered, why are there chargebacks?

  • Was it a discount that was pre-approved in the client’s terms if the debtor paid quickly?
  • Were the goods damaged or of poor quality? Is this an ongoing issue with the client that should be watched in the future?
  • Was the account debtor a bad credit risk and didn’t have the ability to pay?
  • Did the debtor request a credit and rebill for a reason? Do we know the reason? Does it make sense? And, did the invoice date stay the same or did they re-date the invoice?
  • What was the ultimate outcome of the chargeback? Did the invoice pay later? If so, who did the money go to? If not, why was the invoice never paid?
  • Did the client ‘pre-bill’ the invoice and not finish the work?
  • Are there offsets that the debtor took against the invoice that we did not know about (i.e., contra account, deposit, other open credit memo, volume rebates, year end rebates, restocking fees, co-op charges, etc)?
  • Was the invoice even real?

Remember that a factor purchases (buys) an invoice from a client and gives the client money against that invoice. For example, ABC client sends in an invoice for $50,000; the factor reviews the paperwork or verifies the invoice to ensure the work is completed. They should also review the debtor’s credit to be sure they have the ability to pay the invoice. The factor then buys the invoice, advancing typically 80% against the invoice amount. In this case, on the $50,000 invoice, the client would have received $40,000. If the invoice is later not paid, then how does the factor get repaid on the $40,000?

This is the reason that reviewing invoice documentation, verifying invoices and checking debtor (customer) credit are so important to a factor. Good factors know why these chargebacks occur and manage that risk.

Wishing You Continued Success. The Factor Guru.

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How to Smell a Rat

Mar 11

Posted by Gen Merritt in Books to Read | Comments off

Did you know that Ulysses S. Grant had fallen victim to a pyramid scheme? He had a family friend who wanted to start a brokerage business, with Grant as the figurehead and not involved in the daily operations. Grant’s name provided the business venture an element of credibility that encouraged people to want to invest in the company and eventually resulted in severe financial troubles for the former president. The point is this: anyone can fall prey or become a victim of fraud.

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.

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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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Financial Reporting… a telling story…

Oct 13

Posted by Gen Merritt in Operations | No Comments

Ever wonder if you really need to look at financial statements on your clients? Yes, most factors will review the balance sheet and income statements initially, during their due diligence. Most even include financial reporting in their factoring agreements with their clients. Maybe not every factoring company chooses to do this, however, based upon their business model. Some factors focus on small, niche factoring or more collateral-based, hard verification transactions. They may determine that for smaller deals, receiving and reviewing this information is not as important during the initial underwriting process. But, here is the question, assuming you don’t have this type of business model, what about after the deal is funded?

Depending on who you talk to, you may get a different answer… only on those clients that have facilities or fundings over $100,000, over $1,000,000 or more (again, depending on who you ask) or to getting financials on every client either monthly, quarterly or annually. For those that do have certain policies in place, here is my real question: what do you do with them?

Hopefully, this is not just information that is glanced at and put in the client’s file. But, as I have been frequently asked, “What does it matter? Don’t we just need to look if they’re making or losing money?” There is no quick explanation to this question… but the answer itself is easy: No.

For one, many companies today are losing money. Secondly, if you only evaluate financial performance once, you have no trend of data for which to compare the company’s performance. Finally, it is important to compare the client’s data to your data, as the factor. What does this mean? We’ll get there… this article is not about how to read financials, but I did want to take a moment to identify the relevance from reviewing and trending all of this information. Please understand that for most of your clients, it will actually feel like you are just reviewing data and then putting the financials in the client’s file. That’s okay. For many of your client files, this is just a good check to keep you informed of what is occurring in your client’s business.

After all, factors generally evaluate their receivables weekly, review trends monthly, if not more, perform verification and collection calls and other protocols to prevent and manage risk. But, sometimes exceptions occur or complacency arises. Or, for those new to factoring and/or lending, maybe you are not familiar with all the procedures that you may want to have or should have in place for better monitoring accounts receivable and your client’s performance.

So, here is why financial monitoring can be invaluable and the event that sparked this blog.  A friend of mine called the other day to just take a ‘look’ at a company’s financials and to help explain some things to look for when they reviewed the information. We started with using the company’s prior year performance along with their interim financials (balance sheet/income statements). Now, let’s take a look at the summary information: Sales, Margins, Operating Costs and their percentages of Sales. An example is provided below, which is completely arbitrary but gets the point across (I think).

Income Statement

FYE 2008

9/30/09 Interim

Revenues

25,000,000

14,000,000

Avg. Mo. Revenues

2,083,333

1,555,556

Gross Profit

7,500,000

3,000,000

Gross Profit %

30.00%

21.43%

Operating Expenses %

24.00%

25.00%

Net Income after Taxes

1,500,000

-500,000

What can be gleaned from this? The company’s sales have decreased, their margins are down and their operating expenses have pretty much stayed the same… one may want to ask what is going on? Did they lose a big customer? Is there a quality issue? Are their vendors charging them more? Why hasn’t the company also lowered their overhead expenses in relation to their declining revenues? Is the company seasonal? Some would just tell you, “It’s the economy stupid.” These are just some questions for which you may want to find out more, if you don’t already know the answers.

Now, let’s look at the factoring data. During those same periods, this factor had purchased $24mm during 2008 and $17mm through 9/30/09. (And, remember these numbers are not real but exaggerated for illustrative purposes only).

But, wait! Is that right? How could purchased invoices in 2009 exceed the company’s sales?

And, there it is… that ‘light bulb’ moment… need I continue… do I really need to write out what this means…

And, before you say anything, yes, there should have been other signs in the collateral, and yet, sometimes each one of those concerns could have been reasoned away, as they probably occurred gradually, in single occurrences, over time.

Moving on… you may also want to look at certain balance sheet information such as the Accounts Receivable balances. Does their A/R balance correspond to yours for that same time period? In the example above, probably not…

Just think, we haven’t even compared the company’s A/R turnover to the factor’s A/R turnover yet. Can you guess what that information would tell you? Well, to keep this short, we can save that for another time. Just understand that “pre-bill” may be in your future if these numbers are not consistent.

Without over explaining or making this any longer than it already is, I’ll end it here. The point, however, is that checking, reviewing and comparing company financials can be important. It is only an additional tool that factoring companies and lenders rely upon in mitigating risk. But, sometimes these tools can prove to be very telling.

Wishing You Continued Success. The Factor Guru.

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FAQs: Construction Receivables

Aug 22

Posted by Gen Merritt in Operations | No Comments

2ebf976ad673655aFactoring a construction business can pose additional risks. It is important to understand the billing processes and any potential subcontractor liens that may arise and interfere with payments on factored invoices. The discussion below provides some key items to consider, excluding bonded jobs.

The Underlying Agreement. Clients operating in the construction industry may have and typically do have contracts or master servicing agreements for each job being performed. These contracts typically include the work to be done; assignment language; contact information; billing protocols and requirements for payments; subcontractor payment and lien representations, insurance standards, and more…

Each contract should be reviewed, especially if the Client (for this example, a subcontractor on the job) is working on a longer term project wherein they bill monthly (generally on the 20th to 25th day of the month). Although the work has been performed for that month, the entire project has not been completed. So, yes, this would be progressive billing.

Hint: Jobs should be monitored individually, when possible, to follow when the job is completed and that the Client doesn’t invoice more than the contract amount without getting that overage approved in a change order, or in writing.  Especially when amounts billed are greater than the contract amount, change orders should exist. Additional billings that arise due to “verbal” change orders or agreements generally also come with payment problems attached.

Payment Requirements. Contracts may also dictate how the Client should bill invoices and may even include exhibits of specific forms to use for such billing (i.e., AIA forms for Certificate of Payments and Schedule of Values, etc). With these invoices, the Client may need to supply their customer (the Debtor) a release/lien waiver affirming that all subcontractors used on the project (hired by the Client to do work for them) have been paid.

Subcontractor Payments. Because of how the construction industry operates, another element to consider is where the Client stands in the payment chain; how far are they removed from the ultimate payor (the owner). And, how many other subcontractors have they (the Client) hired to do work for them?  Why does this matter? These subcontractors have rights to monies owed… their rights can supersede that of a factor or lender. They are not the same as suppliers on a manufacturing company’s payables listing.  Don’t think that just because you are funding a subcontractor that you are immune to these issues. Knowing that these subcontractors hired by your Client have been paid may be critical in the collection of receivables.

What happens if one of these subcontractors has not been paid? If a general contractor (the Debtor) hires the Client for a $100,000 contract to provide landscaping work and that Client then orders $20,000 of sod to be delivered to the job site, that sod supplier needs to be paid.  If the Client does not pay the supplier, the supplier may have the right to lien that job thereby affecting payments on that job from the Debtor to the Client.

This means that when the Debtor goes to pay the invoice, they may not do so right away, as they probably would have received a notice of the lien being or to be filed. So, first, that payment is at minimum going to be delayed. Secondly, the Debtor will more than likely make a payment of $20,000 to the supplier and then pay the rest of the monies to the Client (or the factor, as applicable).

This doesn’t sound too bad if the factoring company only has a 65% advance rate. However, what if the amounts owed to the subcontractor/supplier were 40% (or $40,000) and what if the factor had advanced 80% (or $80,000) to the Client. The factor would have advanced $80,000 to the Client and would only receive $60,000 back from the Debtor.

Know the Law. Each state is different but all tend to operate much the same in that if companies have performed work (labor) or delivered materials to or hauled materials from a job site, those companies are to be paid. There are various notice periods for filing liens and requirements to adhere to during this process. You can usually research your state’s lien and bond laws online, or contact your legal counsel for clarification. These differences will dictate notice periods and eligibility. They will also highlight your risks should you be factoring a Client in this industry.

As an example, a fourth tier sub may not have the right to lien a job whereas a second or third sub tier would.  In Texas, certain oilfield services industries may have up to 180 days to file a lien if payment has not occurred, whereas others may only have anywhere up to 90 days, depending on the type of job and where the Client stands in the payment chain. Again, each state may be different.

I know I can go on forever about liens, subcontractors and other nuances and examples within the construction industry… but this is a blog… not a book.

So, to wrap up, I’ll just list a few other items to watch for when factoring construction receivables:

Retainage: this is typically an amount held back (generally 5% to 10%) from each billing until the job has been completed. I mean the entire job… not just your Client’s portion. These amounts tend to take longer to pay or may not be paid depending on if other parties are owed monies, or if additional charges or fees need to be assessed. In some cases where subcontractors have not been paid during the job, these funds will be used to pay for those outstanding amounts. Because of this, many factors or lenders will not allow these invoices to be eligible for purchase.

Mobilization: billings for work ‘to be done’ on a project when no work has actually been done (yet). The Client may bill Mobilization to ‘mobilize’ their crews, purchase supplies, etc. If the factor advances on this type of invoice, it is important to understand that no work has actually been performed, some would argue this is much like purchase order financing. Look at the contract or call the Debtor to see if they will pay for such invoices in the event the project is put on hold or the work never starts.

Until the next time. Wishing You Success. The Factor Guru.

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Understanding the Billing

Aug 1

Posted by Gen Merritt in Operations, Sales and Marketing | No Comments

invoice-imageSince posting the FAQs: Transportation Qualification, I have received other industry specific questions, all of which seem to relate to understanding the paper being purchased. This got me thinking about the primary focus areas when reviewing invoices and their backup. Here are some questions you may want to ask yourself when looking at your documentation… or when discussing transactions with prospective clients…

How is the sale requested from the debtor?

In any industry, each party typically can evidence the ‘sale’ that generates an account receivable or invoice. Generally, a customer (Debtor) will ask the Prospect (Client) to perform a service or provide goods. This request can be in several formats such as verbally, a contract, work order, services agreement, purchase order, etc. This underlying agreement, when available (and yes, it’s available and does exist), dictates the terms of the sale. Pay special attention to those documents that refer to another agreement, the other side of the purchase order, or a website to print their underlying terms and conditions. You may find this information ‘enlightening’ when you are contemplating purchasing invoices and understanding the true sale arrangement.

How is the sale completed?

Once the service has been completed or the goods have been delivered, the Client can usually show that they did provide this service or deliver these goods. This can be in the form of a timesheet, delivery ticket, bill of lading, third party delivery, etc. There should be a way to show the completion of the sale, such as a sign off of the work completed, delivery documentation, etc…

When does a company invoice?invoices

It is at this point that an invoice is usually created and sent to the Debtor. Remember, the invoice is not what dictates the terms and conditions of a sale. It is a reminder of payment for the services or goods delivered. Understand too that just because the Client prints the invoice off their system does not mean a completed sale has occurred or that the customer will pay. For example, a Client may invoice when an order is shipped; however, the goods may need to be inspected (as per those terms and conditions you found on their website) before payment can occur.

What do I ask for then?

Many times, it is easier to ask the Client how they do their billing. What do they receive letting them know their customer wants to order something or have something done? What do they get when it is completed? What does their customer require for payment? Sometimes, it is better to ask these open ended questions to gain a better understanding of the Client’s overall billing process. For example, if you just ask for the purchase order, it may not include the original underlying contract that exists.

Many factors will request a sample of the Client’s billing during the due diligence phase. Often times, Clients tend to provide a sample that doesn’t match as they are just pulling the closest information they can find on their desk (meaning, you may receive a work order for one sale, an invoice for another and a delivery ticket for another). However, it is important to be able to review an entire sale from beginning to end. Try to have the Client provide you with an invoice and all the backup relating to that ONE entire sale or order.

Once you have a basic understanding of their sales process, new questions may arise as you review this paperwork. Understanding that paperwork is critical, so ask the Client whenever in doubt or whenever something is not clear… it is better to know before you fund an invoice than when you are trying to collect on that invoice.

It is also important to remember that each industry is different and may have various types of documentation specific to their industry. But, we’ll leave that discussion for another day…

Wishing You Continued Success. The Factor Guru.

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Factoring and Gambling: Part II

Jul 17

Posted by Gen Merritt in General Information | 1 Comment

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

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

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

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

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

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

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

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

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

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

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

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

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Missing Early Warning Signs May Be Hazardous To Your Business

May 15

Posted by Gen Merritt in Operations | No Comments

 

9f7d7e4213bb1a961Changes in a company’s performance or within their business may help identify Early Warning Signs before a potential problem occurs. Knowing what to watch for can help. Here are a few more signs and ‘changes’ you may want to be on the lookout for…

Management changes or high employee turnover exists: The question to ask is why? Are there other indicators within the company or the company performance? What is the succession plan and can the business operate effectively without that key employee or manager? What affect will their absence have on the business’s ability to provide you information? Is there a problem in the business itself that would cause management or good employees to leave? Will this change affect your collateral position?

Wiring instructions change: When a company becomes overdrawn on their account, garnishments occur, their bank begins paying down other bank debts from funds received, or other changes, the business may establish another banking relationship. Companies do not normally change their operating account without a good reason. And, I have experienced other cases where the company begins asking for checks to be issued instead of their traditional wires. Again, this is a change. Therefore, this could be a red flag as well; where is that money being deposited now anyhow? Do you get bank statements on a regular basis? Is the money staying in the business?

Payment patterns from customers (debtors) change: This may be a sign of credit deterioration in the debtor, pre-billing or overbilling by a Client, etc. When a customer has always paid their invoices at 40 days, there should be a reason that an invoice remains open at 75 days. Has the approval process changed, is there paperwork that is missing to authorize a release of that check, etc. Do you understand the debtors billing and ultimate payment process? Performing verification and collection calls on purchased invoices will help identify potential problems before they occur. One thing to remember: customers (debtors) do not typically change their payment patterns overnight.

Vendors start requiring shorter terms, cash on delivery, or post dated checks: When was the last time you received an updated accounts payable aging? When cash is running tight, companies may rely on their vendors for an additional source of working capital. However, at some point, this money trail could end. Vendors tend to have closer connections with the company and in their industry than you may have; Pay attention when those same vendors suspect financial distress within your Client. (Oh, and, start requesting and reviewing those payable listings if you are not already…).   

If you begin to see one of these situations occurring, this does not mean you need to over-react. However, you do need to act. Understanding the reasons behind these occurrences is essential. You can’t fix what you don’t know.

Identifying Early Warning Signs can help eliminate or mitigate potential losses before they occur. Dealing with concerns quickly can only help your collateral position as a factor. Should an issue exist, more than likely your Client’s business has already been impacted. Don’t let their problems also become hazardous to your business. Watch for Early Warning Signs.  

Wishing You Continued Success. The Factor 

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