This new service by the International Factoring Association where they announced the launch of an Attorney Locator Service is great. Do you realize the number of factoring companies that have clients in other states and markets? When a problem or concern arises in these other states, having an attorney that understands those state laws can be invaluable.

For example, I have had that fated call from a factor where they needed a local attorney (in that market)… they needed them to help but to also understand factoring. They called someone from the Internet. In fact, this one factor I spoke with spent several thousand dollars on the education process for the attorneys, only to find out the attorney they were using learned ‘a little too late.’ The attorney’s initial complaints did not address the proper arguments; they actually approached the suit as a ‘consumer’ suit… their reasoning had little to do with factoring or the sale of a receivable… let alone payment over notification. After all the legal fees and ‘education,’ the factoring company actually dropped the suit due to the legal fees (costs versus reward). A “pre-screened” attorney, endorsed by another factoring company, could have saved them money… and resolved their lawsuit.  I wish this service had been around several years ago.

Although it seems basic, factoring does require a special niche in the legal realm. Those attorneys who have experience in this segment of commercial finance can help, where others may spend your dollars educating themselves on our industry: factoring.

So, today, this new service through the IFA is designed to match factoring companies, asset based lenders and other receivables finance companies with the right attorney for their needs.  This free service can be accessed on the IFA’s website at Attorney Locator Service link and by selecting attorneys in the vendor category listing.  The IFA’s Attorney Locator Service is searchable by geography and practice area and provides a simple, reliable way to find a law firm which has been “pre-screened” by a peer.  Attorney specialty practice areas which are searchable include Bankruptcy, Collection/Litigation, Article 9, Contract Law, General Business, Litigation, Tax Law and Factoring.

Since these attorneys have been “pre-screened,” it makes it more efficient and more reliable for identifying an attorney who can help when the time comes… and it will.  So, yes, this seems like an advertisement… but it somewhat is. I do endorse it and wanted to be sure to share this link, as it adds value to us all.

Wishing you success. The Factor Guru.

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.

I have received some phone calls this past month from newer entrants to the factoring industry asking me about this conference and if it is worthwhile to attend.  I respond, with full disclosure that I am actively involved with supporting the IFA and say wholeheartedly “OF COURSE!  This conference is a must for any professional associated with receivables finance in any way.”  I say if you can only afford (both in terms of time or money) to attend one conference each year then this is the one.  Yes, you can probably purchase an audio CD after the event – but that’s only half of the draw.

The people that you will meet at this conference you are likely to develop relationships with that will serve you well over the course of your career or through the growth of your company.  I’ve watched alliances form over the years… folks that met each other for the first time who nine, ten, and even 12 years ago are now engaged in participations together, have bought and sold portfolios amongst each other, and have hired one or another in various roles.  I’ve met owners of factoring companies who started with nothing and have grown their portfolio to wild heights.  I’ve met others who have built up a portfolio, sold it, and are now in their second round.  Sad to say, I have seen folks come and go too.  I’ve met new business development people who have moved up the ranks to sales managers, account executives who have moved up to operations managers, operations managers who have moved up to portfolio managers – and many of those will go on to start their own companies.  The amazing thing is that almost all of them will take a moment to provide advice and share war stories, or in general, they are just pretty fun to be around.

It is important to note that it is not just other factors who attend this meeting; Vendors, service providers, attorneys, complimentary businesses also are in attendance – these too can be healthy contacts for you. For example, I really enjoy the folks over at 20/20 Tax Resolution, Ansonia Credit, MotherFund and First Corporate Solutions just to name a few. They know their business and the factoring industry well. Think about it: Where else can you interact with the likes of Mike Ullman, John Beckstead and Steve Kurtz? Even the face reader guy, Mac Fulfer, is scary “spot on” with his observations, and Brian Van Nevel (who must have been a game show host in a past life) will channel his inner Alex Trebek for a very educational round of Factoring Jeopardy.  The creator of the Factor Guru blog, Genevieve Merritt, will be there as well as all the other contributing writers such as myself, Scot Pierce and Rich Eitleberg.

So if you haven’t already signed up… I’d be thinking of doing that soon.  The room block ends this weekend – I hope to see you in Scottsdale! It’s sure to be an educational and productive event.

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

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

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

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

Here’s the process:

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

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

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

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

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

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

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

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

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

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

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

More about the author.

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

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

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

Trend Cards, however, can help identify Red Flags as a whole and can provide a tool in monitoring accounts. Most Trend Cards include a 12-month period reflected on a monthly basis showing aging trends, dilution, receivable turnover, or other data points you want to measure. These reports can be manually generated in Excel or Access; some factoring software systems may include automated reporting for this information as well.

When reviewing trends, it is important to watch for anomalies. Below are some key data points you may want to monitor more readily:

PURCHASES. For example, monthly Purchases may illustrate sudden increases or decreases in sales, which may be attributed to seasonality or even a loss of customers because of quality issues. Where sales are suddenly increasing, this may be because of recent large orders or possibly even falsification of invoices. If a Client has no Purchases during a month, this could be a Red Flag.

COLLECTIONS. Changes in Collections can signify other Red Flags. You may want to ask yourself: Are there concerns within the verification or collection calls lately? Are all the checks going to your lockbox? Are customers paying more slowly? Is this a sign of potential pre-billing? Look for consistency in the relationship between Purchases and Collections. No Collections in the last month or erratic relationships between the Purchases and Collections could be a Red Flag.

DILUTION. Dilution changes should be monitored as well. Dilution results from the non-cash deductions to receivables. This is any time an invoice is not paid in full at par (face) value; therefore, reserves are applied for discounts, short pays, charge backs, credits, and other non-cash entries. Material increases in Dilution should be addressed.

Changes in dilution may represent a change in the Client’s business or billing practices. Are more invoices being charged off, disputed, or collected by the Client directly? Has the Client grown too quickly or not been on top of billing and collections as tightly? These are questions you may want to get answered.

It is important to note that typically an advance rate is initially set based on the expected Dilution. If over time, a Client’s advance rate stays at 80% but their Dilution increases to 25%, then for a $1,000 invoice, the advance to the Client would be $800 but only $750 would be paid by their customer.

THE AGING. The aging allows you to see how a Client’s typical receivables are spread over time. Watching for anomalies in this spread is important, as an early detection method or as a note to start monitoring a Client more closely.

As you can see, trends are a historical perspective only; however, when reviewed as a whole, these trends may reveal inconsistencies that may need to be addressed. For additional information on this subject, please feel free to email me, or call the International Factoring Association for additional reference contacts.

Wishing you success. The Factor Guru.

It also brought about something else: help others, acknowledge those that are learning and work to help them succeed. Several people, industry veterans as I would call them, always went above and beyond, out of their way, and more to help me learn more. I was lucky, I guess.

For this weblog posting, a friend of mine and one of my mentors, Darla Auchinachie, a 17-year veteran in the factoring industry and a long time speaker, board member and advisor for the IFA, agreed to write an article. To maintain this trend of helping others in the industry and showing her continued dedication to the industry, she has shared an article with us that rings true… for factors, clients and others. Pay attention. I always did.

This is an open letter to every factoring company executive. 

                Unless you’ve been stranded on an island the past year, you probably haven’t been able to escape the news concerning the biggest economic crisis to hit since most of us embarked in the career of factoring.  As we enter the new year the media claims we just can’t wait to get this behind us.  But wait, the factoring community simply can’t go along as business as usual expecting to avoid being impacted by the crisis merely because a new year is upon us. 

                It’s time to take a serious look in house and be prepared to engage in some strategic planning to take your company through these incredibly challenging times.  I spoke to a trusted friend recently, his comments keep ringing through my ears.  He says, “Its bananas out here”.  Yep, that sums the economic crisis up, especially to the all the factoring companies, bananas just bananas. 

                The economy is shrinking, but wait it’s the perfect storm for us – banks will get out of our space, we’ll be flooded with opportunities is one point of view.  Another says yeah, but credit is our biggest concern right now, and it should be retailers, the auto industry, the oil companies in our account debtor base, the bankruptcies are sure to start stacking up come the first few months of the year.  Yet others are concerned for their own liquidity and access to capital. 

                Bananas, heck we have a whole fruit salad. 

                I call on every factoring company to consider taking action on a few items which will see them through the murky times ahead.  Look, no one knows what’s going to happen; we truly are in un-chartered territory, most fear to make predictions, some believe that we will be on our way to recovery by the end of 2009, and yet others are planning how to best benefit through it all. 

                How can you benefit when you can’t even be sure which way the economy will turn or how long this recession will last?  Well, you can’t control the future but you can be informed and prepared, lest you are blindsided by any number of salvos which will surely come your way. 

                They are saying that we are entering into a period of economic Darwinism.  That is to say, only the strong are going to survive.  For example, Wal-Mart will no doubt end up stronger because of the smaller retailers who will fail due to the downturn of the economy.  Here are five steps a factoring company can undertake to make sure they live to factor another day.

#1

                Re-underwrite every client in your portfolio.

                Yes, now is the time to know what you have, the good, the bad and the ugly.  Trust me; every portfolio has some ugly in it.  There is no better time than now.  Sure, most factoring company’s resources are already stretched beyond the limits due to the influx of new business, but if you don’t stop to take a look at what you already have, you will be in for some trouble.

                While the economy had been growing by leaps and bounds and credit had been so readily available, every factor benefited; we took on clients whose risk profile was higher than we would like to admit.  We cannot bury our head in the sand anymore.  You have to know what portion of your portfolio is performing and which portion will become plagued by the recession.

                If you do not have current financial information on your clients, now is the time to request it.  If you don’t have a recent UCC search, why not run a new one?  When was the last time you engaged in a background check on existing clients?  It’s time to look beyond historical dilution and trends, instead it’s time to take a reading on the client’s overall financial health as that is the indicator which will foretell their ability to survive. 

#2

                Re-structure Relationships

                When you find those clients most negatively impacted or the clients whose financial risk profile has changed, you must seriously consider altering the structure of that relationship.  For example, you may have taken a secured position on a piece of commercial real estate as secondary collateral to support a factoring relationship whose risk profile was not in line with your traditional limits.  What is the value of that real estate now?  What is the financial health of the client now? 

                If revenues are down, how is that affecting the business?  What can you really do when you are already in a relationship?  Make sure you are utilizing every collateral monitoring and availability tool in the book.  Don’t let invoices age; don’t take on unnecessary credit risk.  Counsel your clients on being very careful about extending credit terms to marginal customers.  Start building additional reserves if necessary.

                Reduce your exposure whenever possible.  Make sure your client’s maintain some skin in the game.  Consumers are walking away from the value in their homes because they just can’t make ends meet.  What decisions will your client have to make with their business?  How does that impact your existing A/R?

#3

                Get your house in order and have a contingency plan.

                Since we don’t know what surprises are on the horizon for the next 12 months, it might also be a good idea to keep your books and records in manageable order.  Whether you have $500,000 of your own funds employed or you work for a company who has $200 million employed, there is a very real possibility in 2009 that a factoring company’s access to additional capital will be slim to none.

                Be prepared for an audit either from your capital provider(s) or from which you are seeking capital.  The better your files are, the better your audit results will be.  It doesn’t hurt to triple check that your documentation is in order, proper names, trade names, and all that.  By the way, when was the last time you checked to see if a client was still operating under good standing status in their state, update everything in your files!

                Factoring companies may find it hard to raise capital in the form of subordinated debt; others may find that their institutional funding has dried up.  Worse still, your lender could exit the business abruptly.  Have you taken the time to review your portfolio and operations to make sure it remains attractive to capital providers?

                Seek out assistance within the industry or outside of the industry, but do something and have a plan in place should something like this occur.  If you make it past 2009 and the economy heads upwards you may breath a sigh of relief – until then, how prepared are you?

#4

                Keep employees educated and motivated.

                Factoring is such a unique business, there is a human element deeply engrained in this profession.  Make sure the folks on the ground know how to sniff out problems.  Account Executives shouldn’t let a week go by without having some contact with the principals of your clients.

                Stay involved in providing continuing education to every member of your team.  Let them know that the playing field has changed out there.  It’s not all about proper verification and notification anymore.  Your team should be looking out for different kinds of stresses such as signs of employee theft as well as pre-billing, over billing, and the like. 

#5

                Don’t be afraid to take action. 

                Sometimes, as a factor we are faced with making unpopular choices, especially when it comes to calling a client in default and entering into a realization phase.  Now is not the time to use hope as means to operate, it is the time to deal with facts.  Clients who do not have the ability to cash flow even with the factor’s funding may simply be too big a risk to continue servicing. 

For those avid ABF Journal readers, look for an article soon on “The Perfect Storm,” that stemmed from a recent panel discussion hosted by the Finance Forum. Several analogies arose during this meeting that related to that movie and the current economic credit climate (or credit crunch). Those analogies were symbolic in a certain sense. They illustrated how we got here… where we are today.

During another meeting this week, one of the board members of the Finance Forum, Josh Steele of Euler Hermes, noted another movie, The Day After Tomorrow, which held other similarities. He described it by saying, “In the movie, the ice age is the Earth’s way of cleansing itself. In a way, this [crisis] is a way of getting rid of less stable companies.” The Perfect Storm was about how we got here; however, what happens after the storm? What happens tomorrow?

This credit tsunami, as Greenspan noted, evolved after years of overextending credit. This occurrence also fits within the factoring space with the number of factoring companies aggressively competing in a marketplace where working capital was abundant, where mitigating concerns and overextending credit was not the exception, but a way of doing business. Now, take a look around. The landscape has changed, and tomorrow is a long ways away.

If you recall, after the storm first hit, New York residents and visitors were running, seeking shelter. Respectively, factors have been looking harder at credit and how to better structure deals, yes. Some factors believe that this is all that needs to be done, just a little more structure, just a little more due diligence. All is fine, right?

The factoring world is entering a new era that will probably continue over the next few years. Its presence will unfold even more through 2009. How factors react to this credit crunch may be telling in how and, more importantly, who will come out of this storm intact. Will we all learn from each other’s mistakes?

In The Day After Tomorrow, some people [factors] decided to go outside, venture back out into the streets where they believed everything was safe once again… it was back to normal… or so they thought. But, this was only the beginning. It was then that the landscape changed, even more. The freeze hit. Do not construe this as a credit freeze. Even though it is a credit freeze for many traditional lenders, it is not for many factors… necessarily.

What it is, however, is more due diligence than originally contemplated, more monitoring on existing clients and for client customers (debtors) than was initially planned, and more focus on staying the course through this storm. It’s a time to review and assess our new environment and the players within it. Not all of them have survived; not all of them will survive. The landscape has definitely changed, and it is not over yet.

So, again, as Jason Evans [Dash Mihok] asked in the movie, “What’s going to happen to us?” Jack Hall [Dennis Quaid] replied, “What do you mean?” Jason expanded, “I mean us? Civilization? Everyone?” Well, what do you think the answer was… Jack summed it up with, “Mankind survived the last ice age. We’re certainly capable of surviving this one. The only question is will we be able to learn from our mistakes?”

Wishing you success. The Factor Guru.

Wait, that’s it: “mostly” delivered. That’s the word that factors have a hard time with… mostly.  The fundamentals of factoring rely on delivered products and services performed in full. Nothing remains to be done. The sale is final. The invoice will be paid.

With the word “mostly,” however, the product is not definably delivered, today. Many technology and consulting businesses have services predicated on something else occurring. The services are not yet finished. They may need something else to happen for payment, or they may not. It just depends, right? The invoice, therefore, may at the end of the day still be disputed. So, what do you do?

Well, the best thing would then be to get a confirmation from the customer that the invoice will be paid in full, without offset, without dispute, and, hopefully, the factor is ensuring the payment is going to them pursuant to Article 9 of the Uniform Commercial Code, as outlined under the notification of assignment letter that is sent to the customer (account debtor). If you have never heard of a ‘no offset’ letter or an ‘estoppel’ letter, then call your legal counsel. Check out the International Factoring Association for legal counsel, if you don’t already have someone to prepare one for you.

Now, as a business development person, try telling this to the client. The company may not  understand. They have never had someone not pay; it just hasn’t happened to them. It’s only happened to other people. So, why do ‘you’ need this letter (the factor – the independent third party)?

This type of transaction may have been structured and approved under the ‘we did it before, so why don’t we do it now’ mandate. Remember, however, that was when working capital was at a surplus, when factors and lenders were aggressively competing in the financial marketplace.

So, after you see a deal like this, talk to them, maintain a good relationship with them, get prompt and accurate information from them, it is definitely hard to then say, “No, we cannot do your deal (the way you would ideally like),” or however you approve a transaction with certain requirements that the client ultimately then says no.  

When it is all said and done, sometimes you have to step back and say, “Can I get out of their transaction tomorrow?” That’s my motto, right? So, why is it so hard when you are so close to the client and the owners… just after a few phone calls and an in-person meeting? Well, because the answer to your own question was, “No,” even after all that.

So, once again, that is what I have to remember: honesty and candidacy is the best policy. You have to explain how a deal needs to be structured and also monitored. You have to tell this to the prospective client. You have to further explain and describe why this is the only way you or your company can approve their request. If their request to approve the transaction cannot be done, then it just can’t…or it can’t be done by your company. Maybe they can find financing elsewhere; however, with the current credit environment, I have to say there are slimmer pickings.

At the end of the day, a factoring company has to ask themselves, “Can I get out tomorrow?” They have to have an exit strategy. If the answer that comes back is anything less than a “Yes” then maybe the transaction is not meant for factoring. Sometimes, you really do have to say, “No,” even when you want to say, “Yes.”

Wishing you success, without regrets. The Factor Guru.

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.