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.

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.

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.

Most factors avoid construction because of the high risk in handling these invoices.  To make significant money the factor really has to be properly set up to address this niche.  In the case of our portfolio, we add one primary eligibility safety net by only entertaining public works construction projects.

How does a factor who does not specialize in this niche know that a colleague has the capacity for public works construction?  Question them about the following capabilities:

—Does this factor engage in “progress billing”?  Can they handle invoices covering a percentage of the completed project which are part of a larger contract (different from spot factoring where each individual invoice closes out)?

—Will this factor take on “bonded contracts”? Will they factor receivables even though it is implied that the surety is in first position?

—Does this factor have a “disbursement program” with funds control, so that advances are only used to pay costs on that specific job?  Through this program the factor provides a high level of assurance to project owners, General Contractors, etc. that funds advanced go only to that job before any other contractor expenses get paid.

—Can this factor undertake initial plan reviews, evaluating the project and the bid of the contractor to make sure that the contractor has the ability to perform the work estimated with their available labor using the specified materials required in accordance with the pricing quoted, in the time frame provided?

The 6-C’s of credit (Character, Capacity, Capital, Collateral, Conditions, and Controls) are the key for factors to analyze contractors and subs seeking working capital and cash flow.  It is critical for both the contractor and the factor to fully understand their transaction.

To pre-qualify a prospective contractor or sub, company ownership, structure, existing lending relationships, current accounts payable and accounts receivable aging summary are evaluated. Also reviewed is the current and previous year’s financial statement including balance sheet and income statement. We look for a candidate who does not have liens and judgments that can get between the factor and the receivable.  We look for a record of past profitability and whether margins exist to be able to afford our form of capitalization.  At this point of the discussion, a demonstration to the contractor of how our capitalization increases their ability to be profitable and benefit from procurement discounts is important in selling a deal of this nature.

Additionally, the prospect should have at least one or two years of experience in the type of construction they are working on and have a personal credit score of 550-600 or higher. A lower credit score does not always prohibit the factor from proceeding, though. The factor must determine why the contractor suffers from weak credit and determine if there are actions that can be taken through the factoring of their receivables that can result in the contractor becoming credit-worthy without increasing the risk to the factor.

Because most banks continue to be unwilling to lend working capital to contractors, the current need in this space is extraordinary.  Factors should not dismiss these opportunities for income-producing deals in the building trades and general construction which are ready-to-go.

About the author. Earl Harper is a Senior Vice President with RMP Capital Corporation, a national factor specializing in public works construction based in Islandia, New York.  Mr. Harper has more than 15-years of experience with the management of contractor financing and employee benefit program administration.  Mr. Harper’s specialty at RMP Capital is servicing the needs and businesses of their client contractors, from bringing in new contractors, to giving extensive coverage and care to their existing clients. Prior to his success in the financial world, Mr. Harper spent over 24-years as a military officer retiring from the Army as a Colonel.  Mr. Harper is also a graduate of the US Army War College and has a bachelor’s degree from Iowa Wesleyan College. To find out more about Earl Harper or RMP Capital, visit their website at www.RMPCapital.com.

For new business, many of us have looked at more and more prospects to ultimately only fund the same number of deals. Issues arising from the economy last year have spurred additional due diligence and research on these prospective clients to ensure a long standing relationship will exist, or can exist in the first place. The question that always comes to mind: can you get out tomorrow?

So, where does that leave 2010? Well, we are well into the first quarter and business opportunities have been increasing, provided you have the capital available… but that is another discussion for another day.

By now, you hopefully have already evaluated your portfolios to determine areas of potential loss and/or weakness. You have also by now identified areas of improvement in your operations and portfolio management to help ensure proper checks and balances internally. For an extreme example, does your account manager handle the verifications, daily fundings, collections, and payment application for their clients? How would you know if something arose that should be a red flag? Maintaining appropriate checks and balances can be critical in today’s environment. Establishing certain communication protocols both internally and externally can prove to be invaluable within an operations department.

The recent increase in deal flow should, however, not equate to reducing the recently increased monitoring and account management standards. This year will be just as challenging for many as last year. Time and time again, I hear that factors are going back to the basics: maintaining verification and collection efforts, monitoring collateral trends in purchases and cash  management, reviewing and adhering to debtor credit limits, and understanding the billing of the client and what they do (i.e., industry in which they operate, etc). Factors are also paying more attention to early warning signs that may be indicators for potential concerns.

All I can say is be prepared… be proactive and not reactive, as they say. Surprises are not always a good thing.

Wishing You Continued Success. The Factor Guru.

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?

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.

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.

Who said factoring was like gambling? Lately, now that I have been playing poker, I wanted to examine this concept… or misperception. Many people seem to say this ‘gambling’ comment flippantly only because of a perception that they believe exist. However, sometimes, you have to delve deeper… to find the truth. After all, perception is reality… right?

No. Not always, if you choose to look hard enough. So, let’s go with my basic assumption of Texas Hold ‘Em. After all, I am from Texas.  

The first rule: the one with the most bank has the best chance of winning. Do you have enough capital to play the game for the long run? Factoring is not a game you get in with limited capital. Don’t take it lightly. Real money is at stake. You have to have sufficient funds to play the game. One loss cannot dictate your endurance in running a finance company. Putting “all your eggs in one basket” may help you grow; however, can you survive the loss? If you experience losses, are you still in the game? And, will a large fraud break your bank?

If so, factoring is not the business for you… when you are new to the game. This mainly applies to those who do not do their homework, who do not understand that vigilance in underwriting and monitoring deals remains a key aspect to the factoring business. No one can teach you how to start a factoring company without also explaining the risks. It’s about your people, processes, systems… and more. Just think, all that is before you start.

You also have to understand the risks, how to mitigate those risks and how to monitor those risks over time. When you set out to start your factoring business, capital is essential… But, keeping your capital is critical. It’s not just about putting the money out there; it’s really about getting the money back!  Funny that in poker, it’s not about the risks, it’s really about getting your return (and your money back). Hmmm…

The next rule: Do you know the cards you have been dealt? Are you really looking at what’s in your hand, or are you just chasing the cards you think you have? For example, what do you offer relating to your corporate ‘tiers’ such as People, Processes, and Systems? These tiers are your strengths. Know your tiers. Know your strengths. Play to those cards. Within this,

First, know your people. Can the personnel you have handle the type of clients you are seeking? Can they handle the type of account management required for those specific accounts? Do those personnel truly understand the dynamics of various industries in which you may want to branch out into to diversity your portfolio?

Second, know your processes. Setting up procedures within your company can be essential. Think about those unique situations that require governmental regulations (i.e., Assignment of Claims, CAGE codes, etc), monitoring transportation carrier payments, or even subcontractor payments (i.e., lien releases, etc.). If the processes you have in place do not include this type of account management, then those processes are insufficient to effectively manage those types of client accounts.  

Finally, know your systems. Do you have the proper software to effectively monitor certain types of accounts? This also may include transportation, construction, or other types of processes and reporting that are being done manually within your company. Technology options exist that help monitor certain industries and assist in improving your systems to better manage your client accounts effectively.  

If you don’t know these basic tiers about your business as a factor, then how can you know what you can do? How do you even know how to read your cards? Again, if you don’t understand these fundamentals of your factoring business, you will experience challenges in managing your portfolio, let alone expanding or diversifying. Know how to read the cards you have been dealt.

With all of that said, I’ll save the next rules for another blog. But, good luck! Remember, know your capital. Know your cards.

Wishing you success in your game. 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.