I’ve written a bunch of articles about what to look for when funding a new client. Whether it’s proper notification or having an ironclad factoring agreement, you should always have a consistent set of due diligence procedures that adequately protects your company in every factoring transaction.
With any new deal there will regularly be nuances that are unique and test the funder. In many cases getting past these roadblocks can make or break a deal.
With any factoring company, one of the biggest challenges is to scale the company for growth while keeping the proper safeguards in place.
The friction caused by this dilemma is usually felt by the sales and underwriting divisions within a company. Salespeople complain that the underwriters turn down too many applications while underwriting complains that sales wastes their time with prospects that will never fund.
An interesting dilemma indeed and truthfully there really isn’t one side that comes out on top in this battle. On one hand, if you fund every prospect that sales submits, it’s likely that you will get burned with a bad deal. On the other hand, if underwriting turns down every deal that comes through the door your sales will be nothing, making it difficult to keep your doors open. Our position has always been on the side of caution with the thought that no deal is better than a bad deal.
Here are a few examples where you should proceed with caution when factoring invoices:
Every prospect wants to be funded immediately. This is not necessarily a red flag by any means however you should not compromise your standard operating procedures to accommodate an impatient prospect.
Confusing Financial Statements
If a prospect cannot provide you with audited financial statements always ask for tax returns. Tax returns are extremely valuable since you can use these to compare amounts to similar period financial statements. If the returns are older than one year, you should question why they are not current. Also, inconsistencies in the financial statements such as large swings in revenues or expenses from prior periods should always be questioned.
Uncooperative Account Debtor
If you have a hostile account debtor that is unwilling to work with a factor think twice about moving forward with the prospect. First and most importantly, you will not have the ability to verify your clients’ invoices. For us, there is nothing more important than verifying your clients’ goods or services have been accepted and approved for payment. Without proper verification, you are basically gambling on an invoice hoping that it will be paid.
Tax Liens and Judgments
One of the first pieces of due diligence every factor performs is a credit check of both the client and account debtor. Obviously, every factor knows to stay clear of any clients with open tax liens that have not been addressed by either a payment plan or some future intent to pay. We would take that one step further by staying clear of any company that consistently fails to pay their taxes in a timely manner.
What makes the factoring industry unique is that every factoring company has its own set of policies and procedures for funding new prospects. What may be overkill for one factor may be acceptable for another depending on the situation. One of the main reasons why I truly enjoy working in this industry is the camaraderie among factoring companies. I cannot tell you how many times I have been able to call a colleague, asking them for their expertise with a specific client. Occasionally I am able to reciprocate with some insight from our end as well. At the end of the day we’re all trying to figure out ways to fund the good ones and stay clear of the bad ones while keeping salespeople and underwriters in a happy place. This is easier said than done for sure.
This article was written by our president Don D’Ambrosio and originally published in Factoring Investor on October 21 2013.
Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California.
For more information, he can be reached at firstname.lastname@example.org or you can visit his company’s website oxygenfunding.com