By reading the title of this article I bet many of you would think I am about to unleash some wonderful pearls of wisdom about how to find the perfect factoring deal and what is the best industry in which to focus your marketing efforts. If I had the answer to that question I would probably be sitting on a tropical beach every day enjoying the beverage of my choice.
All kidding aside, every company that provides financing whether it’s in real estate, consumer products or asset based lending knows there isn’t a full proof method to find the perfect deal. If you go back just a few short years ago to the Great Recession of 2008 we are easily reminded of how the perfect deals went south in a very short period of time. Today we are still feeling the effects of overvalued properties and poorly underwritten mortgages that allowed for a chain of mistakes that led to a global financial crisis. Conventional wisdom at the time was that homeowners, whether they were first time buyers or looking to refinance, would be qualified on credit and collateral. The credit determination was usually based on an applicant’s individual credit score and income while the collateral was based on the value of the property. As large investment banks began packaging mortgages in securities (and started making a healthy profit in the process) more buyers of these instruments sprung up and the mortgage boom was created. As the appetite for mortgages grew, newly formed originators and lenders followed suit. Unfortunately when demand exceeds supply corners get cut. In the case of the mortgage boom, credit guidelines were loosened and values of homes were over inflated. Many homeowners saw this as an opportunity to tap their equity or even buy new properties and flip them at a higher price. The demand for real estate was so high leading up to 2008 that values would increase every few weeks. The envelope was pushed so far that the credit quality of borrowers got worse, homeowners were overextended and eventually defaults became inevitable. The downward spiral got even worse as property values declined and those large investment bankers that were so enamored with purchasing mortgages suddenly went away. The bubble had finally burst and the fallout was really ugly.
What does this example have to do with our original quest in trying to find the perfect deal? First and foremost we all know that there really is no secret place to find the perfect deal. Granted, there are industries that are preferred by invoice factoring companies but it doesn’t make them bullet proof. During the height of the mortgage boom it was widely believed they had found the perfect deals or at least perfected a way to evaluate them. As long as the borrower had a credit score of “x” and the value of the property was “y” lenders could fit you into a rate sheet and make the deal work. Conventional thinking in factoring is that the transportation, staffing, apparel and a few other selected industries are the most suitable to fund. Our take with this line of thinking is that you always take the good with the bad no matter which industry you are planning to fund. Experience has taught us to weigh every deal equally. No matter the client, account debtor or industry, we need to understand the deal before we can even entertain accepting an application. This includes checking off the boxes on due diligence procedures, constantly monitoring credit quality and engaging with the client whenever necessary. I realize this may sound foolish, but I cannot tell you how many times there are conflicts between what the applicants say and the paperwork gathered with the application. If you cannot understand the deal flow, run it by a colleague or professional in that field who may have more experience and continue to ask questions. Sure, the concept and mechanics of invoice factoring are very straightforward but each deal is unique. Pure vanilla factoring deals are rare. In other words almost every deal has a “but” in it. How often do you come across the perfect client with stellar account debtors but they have a recent tax lien that has not been addressed? What about the well known account debtor that the prospect just landed but refuses to verify invoices? For those of you new to the factoring game you will find that much of closing new deals depends on your ability to work around the obstacles while protecting your security interest in the transaction.
Our industry comes with a very high risk reward factor attached to it. What drew me into this line of work is that you really have an opportunity to work with businesses to help them grow. What makes our industry unique is that each funder has discretion in the amount of due diligence they apply when evaluating a new deal. It’s a classic case of one company’s trash may be another ones treasure. Your company’s mentality should focus on bringing in new clients to get a return on your capital but more importantly concentrating on the preservation of your capital. You may not always find the perfect deal but a bunch of good ones will do just fine.