Talking among some factoring companies the other day, I realized that many had differing views of the current credit market. I found it interesting that many of their perspectives stemmed from the condition of the factoring company itself: some factors were experiencing increased deal activity albeit with minimal increases in actual new business closed, others were targeting newly presented opportunities such as available acquisitions and others were focused on accessing capital to finance their clients (to be addressed in another weblog).
But then, there were those focused on problematic accounts. Actually, many factors were experiencing what I refer to as ‘challenge’ account situation, meaning both workouts and turnarounds.
In the current economic climate, however, many of these ‘challenged’ situations are now long term commitments for both parties: the client and the factor. Oddly, a lot of these more problematic accounts arose initially because the basic factoring fundamentals were not upheld… specifically notification. Because this is a building block within factoring, I have to say I was astounded at how many stories I had overheard pertaining to this specific issue.
Pursuant to Article Nine of the UCC (Uniform Commercial Code) factoring companies should incorporate a notice to the customers (debtors) of their Clients notifying them of the sale and assignment of the Client’s invoices to the factoring company. In reality, how else would those customers know where to pay or why they should pay you, the factor? This notice generally includes providing new remittance address information for where those debtors should pay invoices.
Side Note: Look at the checks that come through the lockbox. Are they mailed to the proper address or has the Client received them and then forwarded them to the lockbox address? This could be an indication that the debtor is not adhering to the notice.
I tend to recommend that any notices sent to a debtor should include ‘sold and assigned’ language in the notification letter; using a stamp or other legend on an invoice is also advisable; although some may consider this duplicative in meaning, it saves ambiguity (or confusion) for those customers.
Taking a stance of being more conservative? Protect yourself as a factor.
Operating under the K.I.S.S. principle? Send letters with proper notice, meaning stamp, label or include in the invoice template that language… why make it complicated? And of course, remember any advice pertaining to notification should be reviewed by legal counsel.
Now, many factors that purchase invoices send notice letters via overnight, certified or even fax delivery. There is a reason: Evidence. Not that it is necessary, but it helps. Think of when you, as a factor, need to prove that you did in fact send the notification letter, such as when a debtor states they never received the notice, didn’t know about the relationship with the factor, or states the Client instructed them otherwise of the factoring relationship, or maybe the debtor indicated the relationship had been terminated, or at least they were told such by the Client.
But, what happens when you send a letter to the customer and they still pay the Client at the Client’s address?
If you call the IFA or your legal counsel, they may direct you to use an ‘alternative’ letter to help protect your rights as a factor, or they may instruct you not to purchase future invoices for that customer. Remember, though, this decision may also be predicated on other general credit rules, including debtor concentration for that Client.
For example, if the customer is the sole customer for a Client, it is critical to ensure that customer pays the factor directly. However, if the customer represents five or ten percent or less, the factor may choose to send this type of ‘alternative’ letter to protect their (the factor’s) rights while still relying in some way on the Client’s reserves, all depending on the specific circumstances.
In any case, it is essential in a factoring operation to incorporate a notification process before, during and through a workout situation. Do you have these in place? Do you know?
These processes can sometimes become keys in managing the overall collectability of a Client relationship along with the exposure where situations arise that present an adverse condition between the factor and the Client. I can only implore you to evaluate these processes and the steps you take as a factor during each phase of a Client relationship. The current credit markets demand vigilance, as I always hear… and I couldn’t agree more.
Wishing you success. The Factor Guru.