The Factor Guru

Tips on accounts receivable financing and business practices.

Posts Tagged what is in your existing portfolio

A Look Back and Ahead

Mar 3

Posted by Gen Merritt in Operations | Comments off

2009 was a tough year. That is all I hear. For the existing portfolios, revenues were down for the most part last year; some publications have noted a 20% to 40% downturn last year resulting from the economic decline. Note that much of this may be dependent on the industry in which a factor may have a niche. Factors have been increasing their monitoring procedures to stay more in tune with their clients’ businesses and collateral performance. More research and credit limit adherence is being required for debtor credit. Think about what it says when bankruptcies increased 25% to 50% over 2008; tax lien filings increased over 25% from the prior year.

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.

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What Trends May Signal

May 28

Posted by Gen Merritt in Uncategorized | 1 Comment

Many factoring companies utilize Trend Cards to help review accounts on a monthly basis. These management reports are a reflection of what has already occurred within a Client’s performance. Therefore, no surprises should exist as the daily account management should pick up potential concerns and changes… as they occur.

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.

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Factoring is Like Gambling: Part I

May 5

Posted by Gen Merritt in General Information | No Comments

4d2eb19fabab5450-32Who 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.

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A Bumpy Ride: Plan Accordingly, Hold on Tight

Sep 29

Posted by Gen Merritt in Economy, General Information | No Comments

Okay… so only those of you who know this person will understand, “Are you kidding me?” Yes, that is what I said. The events of the past few weeks seem utterly surreal. Before you can process what just happened, another headline appears on your computer’s home screen. It’s all anyone talks about… the wild ride on Wall Street… and, it is downright scary when you think about it all. So, get ready…

Let’s recap on a few of these events since the Fannie Mae and Freddie Mac debacles roughly two months ago, although that wasn’t really the beginning was it? (More of an aftershock from deeper rooted decisions).

Bear Stearns, Lehman Brothers Holdings bankruptcy, Merrill Lynch, and the government takeover of American International Group, Inc. followed — we thought that was shocking at the time, now,

JP Morgan Chase bailed out the largest bank failure in U.S. history with Washington Mutual even after the $700 billion bailout was rejected by the House,

Wachovia Corporation was sold overnight to Citigroup Inc after a roughly $200 million win in their competitive bid against Wells Fargo,

Yesterday, the stock market fell over 400 points in less than five minutes; quotes from this day included “worst decline since 1987” and “the sum of all fears,”

There are now only four national banks (Citigroup Inc., Bank of America, JP Morgan Chase, and Wells Fargo… or would that be six with the other two changing their charters last week).

And, it’s not over yet…

The auto industry just received a $25 billion bailout of their own,

The government is still pumping in billions of dollars into the financial system and housing market, 

Congress has been in the midst of marathon sessions.

And, let’s not gloss over the other sideline headlines, further evidence that the buck didn’t stop there.

National City stock plunged yesterday and was downgraded begging questions relating to their future (…not going to go there but I will note their stock was trading less than Wachovia Corporation at the close of business). There are many others lingering in the sidelines; just a matter of time (or days as the events of the last few weeks have shown). Some experts anticipate up to another 1,000 bank failures over the next six months. Not all of these can be ‘rescued’ by the Fed. And, we haven’t even touched on the global market effects. 

Someone asked me yesterday, “What does all of this mean?” Honestly, how do you even keep track, or explain the fact that it would be like cutting everyone’s credit cards in half… all at once. And, that assumes they have jobs and will still have an income. Unemployment is expected to be over seven percent by 2009, the highest it’s been since the 1990-1991 recession.  The Secured Lender referenced an article that equated this ‘crisis’ to “depriving a body of oxygen.”

Of the banks left, there are some that are now implementing floors on pricing and even escalating pricing on already sent proposal letters for new commercial loan transactions, including for asset based lending deals. I guess this is better than the alternative… dare I say it… not making loans.

Even in this market, that may seem like a drastic measure, until you take a deeper look. One reason may be that LIBOR jumped to over three percent and may still rise; Prime may drop below this. Can you imagine? 

Stop — think about what I just said. Doesn’t that mean that some companies with low interest commercial loans would actually pay less than some banks or financial groups pay for their money? It is a Mad, Mad, Mad, Mad World (as Mark Sunshine’s First Capital blog noted).  

And, for factors, it will not be any easier. Yes, factoring companies may see a rise in business and in new fundings during this time period. But, what’s underneath? Take a careful look: What is in your existing portfolio… your existing client base? Can your portfolio handle the ride? 

Bailout, no bailout, we all have differing and apparently passionate opinions on this matter. However, we will all be affected. Who’s to blame, who should be held accountable, who comes out ahead, who suffers the most, who should correct it, and who should pay… the list of questions continues. At the end of the day, no one knows for sure. I just wanted to highlight what we should already know. It will be a long road until we get there. We will make mistakes. We will have to live with them. It will be slow. It will be painful. And, hopefully, the market will correct itself over time. Until then, stay the course, plan accordingly and hold on tight. Because, those headlines are right: We are all in for a bumpy ride.

 

 

 

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