The factoring industry is unique. If we had to write a mission statement for what we do it would read something like –
“To provide cash flow to businesses to sustain and expand their operations”.
The cash flow that factoring companies provide is through the purchase of clients receivables at a discount which allows the client to utilize the capital for expansion, take advantage of vendor discounts or any other reason they may have to keep their business an on-going concern.
Over the past several years many new factors have entered into the asset based industry, as traditional lenders constricted credit to new and existing businesses. The aftershocks of the great recession had a rippling effect that was felt from Wall Street all the way to Main Street, U.S.A.
The Need For Factoring Due Diligence
As more factors entered in the arena the rules for funding new deals seemed to loosen as more funders attempted to get their money out on the street. I found that many deals we passed on for very good reasons were picked up by a new crop of factors. Some worked out while others failed miserably.
I’ve written a ton of articles about adequate due diligence and the need for factors to perfect their security interest in the receivables they are purchasing. Having a strong factoring and security agreement, executing the notice of assignment, performing thorough credit checking and verification are good starts. There really is no one boilerplate template for factoring due diligence as every client and industry carries its own set of procedures. The method in which you fund a construction client will greatly vary than that of an apparel manufacturer. However, the basics of underwriting should apply on all deals.
Bending The Factoring Underwriting Rules
But what happens when the rules for a particular client and his customer may need to be adjusted to get the deal done?
As much as you want to check every box off your funding checklist sometimes it’s just not feasible. For example, several years ago we had a client that worked with a very large well known apparel manufacturer with outstanding credit. However, when we called their 800 number to verify the invoice they would only confirm they received the goods at their warehouse and they would not be inspecting them for another few weeks. In the meantime, the client has just sent us his invoice for 100k and wants to be funded yesterday. He already has three new purchase orders from the same customer and needs to buy material and cover payroll for the work.
What would you do?
There are options like credit insurance or lowering the advance rate but no matter what you choose the client is not going to be happy. We were able to figure out a solution but I will save that for a future post. The point being made here is that factoring deals force your hand.
Experience has taught us that one of the biggest challenges in funding invoices is verification.
I can actually empathize with the account debtors paying the invoice. Prior to factoring they never had to deal with some strange third party calling their office to verify the goods have been delivered or the services performed. Remember, they have bad days as well, so exercise professional courtesy when engaging with your clients customers. More importantly, look for ways to make the deal work by thinking out of the box for both your client and the account debtor. You may not always succeed but providing the effort will go a long way in the future.
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 email@example.com or you can visit his company’s website at www.oxygenfunding.com