A Publication of The International Factoring Association
Winter 2010 • VOL 12/ No. 1
Debtor
quality
trends
ALSO INSIDE:
Is Your Risk Profile Profitable?
Factoring Construction Deals
What Factor Clients Have to Say
Debtor Credit: Important Now More Than Ever
www.healthcapitalinvestors.com
Winter 2010 • VOL 12 / No. 1
Is your risk profitable?
by Vince Mancuso
by Darla Auchinachie
by Dr. Barry Asmus
Factor Construction Deals…And Sleep
Soundly at Night!
Debtor Quality in 2010
What have we learned?
by Steve Ontiveros
What’s New at IFA
Drafting extra protection for your factoring deals
by Scot Pierce
by Dave Wexler
Accounting techniques for factors, part 2
The IRS Collection Process: From Filing to Subordination
by Jason Peckham, Esq.
columns
an inside look Q&A with Bob Adair
sales and marketing Debtor Credit: Important now
more than ever...
by Thomas G. Siska
legal factor recovery of cash converted by client
by John A. Beckstead, Esq.
small ticket factor debtor trends and the very
small factor
by Jeff Callender
ADVERTISER INDEX
20/20 Tax Resolution................................................................. 31
3i Infotech..................................................................................... 13
Bayside Business Solutions........................................................ 8
Boston Financial & Equity....................................................... 15
Capital Software..........................................................................28
Crossroads Financial................................................................. 12
CT Lien Solutions...................................................... Back Cover
Factor Fox.....................................................................................34
Factor Source................................................................................. 9
First Corporate Solutions........................... Inside Back Cover
Hartsko Financial....................................................................... 18
Health Capital Investors............................Inside Front Cover
IFA.................................................................................................... 6
IFA.................................................................................................. 10
LSQ Funding................................................................................ 10
RMP Capital Corp.......................................................................32
The Commercial Factor | Winter 2010 3
from the executive director
“While we are
postponing, life
speeds by.”
Lucius Annaeus Seneca
Although 2009 was a tumultuous year, it was very busy and productive for the
IFA. We have not been sitting on the sidelines, but rather have been actively
involved in creating new offerings and doing our part to assist the factoring
community.
We pride ourselves on our ability to listen to our members and quickly
implement new services that will assist them. While looking at our past accomplishments, we have an eye towards many future offerings. A partial list of our
2009 accomplishments are:
• New Training Courses
– Factoring Government Receivables
– The Law and Business of Factoring
– Surviving and Thriving the Credit Crunch
– Portfolio Management in Turbulent Economic Times
• Membership Plaques
• Updated Forums within the website
• Implemented LinkedIn social networking group
• Produced and released the Factoring Industry Survey
• Both CLE and CPE credits are now being offered for all training courses
• Expansion of the Preferred Vendor Program
• Establishment of Chapters
2010 will be another year whereby we plan to keep moving forward. Some of the
new offerings that we have planned are:
• New Training Courses in 2010
– Advanced topics in Bankruptcy
– How to offer PO, LC & Inventory Financing
– Fraud Detection and Monitoring Techniques
– Portfolio Management
• Release of our Attorney Database
• Annual Conference – April 14 – 17, Scottsdale Conference. We have more
speakers and more networking opportunities than any previous year (and any
other conference). Based on early registrations, we are expecting this year’s
event to set new attendance records.
We have also been very cognizant of the news coming out of Washington
which affects our US based Factors. Therefore, we have helped to establish the
American Factoring Association so that the Factoring community will have a
voice in Washington. By the time you read this, the AFA will have hired a lobbyist
who will be working to protect and promote the Factoring industry. You can keep
up with the AFA at their website located at www.americanfactoring.org
We take our responsibilities of protecting and supporting the receivables finance
industry very seriously. Rest assured we are not postponing.
4 The Commercial Factor | Winter 2010
The International
Factoring Association
2665 Shell Beach Road, Suite 3
Pismo Beach, CA 93449
800-563-1895
Executive Director
Bert Goldberg
Published By
The International Factoring
Association
Editor/Design & Graphics
Lisa Rafter
R&W Publishing Associates
[email protected]
Advertising Sales
R&W Publishing Associates
[email protected]
Advisory Board
Jay Atkins
First Growth Capital
Craig Berry
Phoenix Capital Group
Phil Cohen
PRN Funding, LLC
Michael Miller
Maple Trade Finance, Inc.
Tony Neglia
Stonebridge Financial Services, LLC
Debra Wilson
Vertex Financial Corporation
The International Factoring
Association’s (IFA) goal is to assist the
factoring community by providing
information, training, purchasing
power and a resource for factors. The
IFA provides a way for commercial
factors to get together and discuss a
variety of issues and concerns about
the industry. Membership is open
to all banks and finance companies
that perform financing through the
purchase of invoices or other types of
accounts receivable.
The Commercial Factor is published
quarterly by the International
Factoring Association. To subscribe,
please email [email protected].
The Commercial Factor magazine
invites the submission of articles
and news of interest to the
factoring industry. For more
information on submitting articles
or advertisements, email info@
factoring.org, or call 800-563-1895.
news
Personnel
Crestmark announced the addition of
Jeffrey A. Mitchell as first vice president,
senior business development. He will
report to Crestmark’s West Palm Beach
office, which oversees the East region.
Franklin Capital Network announced
that Kay Berry has joined the company
as senior marketing manager to help lead
its future growth objectives. Berry will be
located in St. Louis, MO.
Spectra Financial Services, LLC has
hired Adam Keck as Director of Business
Development. Adam has nearly 10 years
of experience in the commercial finance
industry.
Sydnee Breuer has been appointed
a Senior Vice President for Business
Development at Rosenthal & Rosenthal.
Breuer will be based at the Los Angeles office. Breuer previously worked at CIT for
twenty years.
Industry News
Hennessey Capital unveiled its new
website, www.hennesseycap.com, designed to showcase its factoring and assetbased lending services.
IBM Global Financing has signed a
financing deal with Advanced Micro
Devices and its distributor network that
will begin the flow of cash and credit in
an economic development zone in China.
With this new factoring license, IBM recently established a new operating entity
called IBM Factoring (China) Company
Limited, which entered into an agreement
with Advanced Micro Devices to factor
AMD sales receivables in China.
Universal Funding has launched its new
website. The site can be viewed at www.
UniversalFunding.com.
BNA Books, a division of specialized
news and information publisher BNA,
announced the publication of American
Factoring Law. This is the first comprehensive treatise on factoring law in
America.
IFS Capital (Thailand), a factoring and
financing company, plans to raise at least
200 million baht in an initial public offering next year.
Tulsa-based transportation firm Arrow
Trucking initiated a voluntary Chapter 7
bankruptcy petition on January 8, seeking
to liquidate itself, just hours after being
sued by its bank for allegedly engaging in
a multimillion-dollar accounts receivable
fraud.
Bridgeport Capital Services has
launched its newly designed website to
announce the company’s move to become
a dominant player providing cash-flow
funding for trucking companies.
Bibby Financial Services added 650 new
clients to its roster in 2009 as small- and
medium-sized companies that found accounts receivable factoring to be a flexible
and affordable financing option to solve
cash-flow problems.
Mergers & Acquisitions
Anchor Funding Services, Inc. has
announced the asset acquisition of
Brookridge Funding, LLC, a purchase
order finance and accounts receivable factoring firm for $2.4 million representing
Brookridge’s outstanding client account
balances at closing, plus an earn-out payment based on its operating income.
BirdDog Logistics Services has acquired
CTG Financial, a privately-owned
factoring services provider. The terms
of the recently signed definitive agreement between the two companies were
not disclosed. CTG Financial represents
a strategic addition to BirdDog’s freight
management business.
Fraud
A federal grand jury charged two men
with creating fraudulent life insurance
policies and marketing them to unions
and a New Jersey municipality. Stephen
Locrotondo and Edward Dombrowski
marketed no-contribution life insurance policies to union members and the
municipality. The pair allegedly defrauded
a New Jersey factoring company out of
$1 million by selling the firm rights to
nonexistent accounts receivables arising
from the nonexistent commissions owed
to Locrotondo for the sale of the fake life
insurance policies.
Fair Finance Co., a Contract Factoring
and Accounts Receivable Management
company, issued a news release saying it
is getting back “the bulk” of its computers
and anticipates restarting its accounts
receivable billing and collection business
since being raided by the FBI .
Tony Prudhoe admitted six counts of
fraudulent trading in March 2007. The
scam involved his firms amassing millions
from banks by claiming advances from
them for work which had never been done.
Prudhoe had an agreement with banks,
whereby they would loan his companies
80% of money owed by customers for
work carried out, until the customer paid
up. The fraud between 1995 and 2000
involved falsely representing invoices as
genuine records of debt. Between 1996
and 2000 Prudhoe’s group of companies
racked-up debts of more than £7m with
Riggs. The bank trusted Prudhoe so much
it even raised his overdraft to £9m.
The SEC obtained final judgments against
former CEO and other senior officers and
directors of National Century Financial
Enterprise for their roles in $2.38 billion
securities fraud. The court entered final
judgments against Lance Poulsen, the
former Chairman and CEO, Donald Ayers,
the former COO and a former member
of its board; Randolph Speer, the former
CFO; and Rebecca Parrett, the former
Director of Accounts Receivable and also a
member of the board.
The complaint alleges NCFE subsidiaries,
known as “programs,” purchased medical
accounts receivable from healthcare providers and issued notes that securitized
those receivables. From at least February
1999 through October 2002, the programs
raised at least $3.25 billion from the offer
and sale of notes through private placements that were exempt from registration. Under the pertinent agreements,
the programs were required to maintain
specified reserve account balances and
certain balances of medical accounts
receivable as collateral to secure the notes.
NCFE directors and officers depleted the
programs’ reserve accounts and collateral
base by advancing at least $1.2 billion from
the programs’ funds to healthcare providers without receiving eligible receivables
in return.
International News
The Moscow Arbitration Court
placed Russian factoring company
Eurokommerz under supervision and
appointed a receiver to the company.
The court upheld a motion to declare
Eurokommerz bankrupt, filed by Trade
House, a creditor of Eurokommerz.
Chile’s largest factoring company
Factorline plans to enter the banking
industry either through a purchase or by
starting from scratch, as well as re-enter
the consumer finance business. Factorline
is also aiming to broaden the array of
financial services it offers by entering the
insurance and stock brokerage businesses
among others.
Revenue of the factoring firms embraced
in the Polish Factors Association (PZF)
fell 8.5%, to over PLN 30bn (EUR 7.37bn
USD 10.67bn) in 2009. However, the PZF
believes that the worst is over for the
sector.
Czech factoring companies financed
purchase of claims for Kc99.7bn last year,
which is a drop of 25 percent on the year,
according to data of the Association of
Factoring Companies (AFS).
The Commercial Factor | Winter 2010 5
6 The Commercial Factor | Winter 2010
Is Your Risk Profile
Profitable?
It is no secret that factoring companies are in the business of managing risk, not
avoiding it. Risk is the basic element that compels our behavior. The future success
of your factoring company will undoubtedly rest on your ability to effectively
manage risk. As we all know, only the strong survive.
BY Vince Mancuso
It is no secret that factoring companies are in the business of managing risk,
not avoiding it. Risk is the basic element that compels our behavior. The
future success of your factoring company will undoubtedly rest on your
ability to effectively manage risk. As we all know, only the strong survive.
To paraphrase John McKinley, author of Strategic Credit Risk Management,
there are essentially three types of risk found in a factoring portfolio:
Transaction Risk, Inherent Risk, and Concentration Risk. The foundation
of risk management in a factoring company is designed to manage to (or
against) all three. The decisions on how we go about managing that risk are
based on a complex infrastructure. This takes into consideration stakeholder
priorities, underwriting and approval processes, a consistent risk rating
system, risk based pricing, account management practices, portfolio review
procedures, and a fail-safe reporting system. Sometimes even this isn’t
enough to ward off the threat of losses.
The Commercial Factor | Winter 2010 7
Three Risk Types:
Transaction Risk. Transaction Risk
can most easily be described as the
risk that centers on the instability of a
client’s collateral quality and the client’s
performance. There are essentially
three dimensions to transaction risk,
all relative to your collateral: selection, underwriting, and operational
management.
Inherent Risk. Inherent Risk relates
to the innate risk in factoring certain
industries or genres. As an example, any
client relationship with sub-contractor
or sub-hauler dependency has inherently more risk than a personnel
agency, because of priming lien rights.
Concentration Risk. Concentration
Risk is the aggregate of transaction
plus the inherent risk within your
portfolio that may result from relationships with one client, industry or even
geographical region. If you are like
most factoring companies, you have
likely defined acceptable concentration levels for each of these. Diversity
in the portfolio helps factors reach a
significant objective: It allows factors to
avoid total devastation. Concentrations
within a portfolio are a barometer
directly revealing the degree of trouble
a factor will experience under difficult
conditions.
The factoring industry has relied almost
exclusively on prior experience as a
predictor of future performance. We
know that is not enough. Just because
it worked in the past, does not mean it
will work in the future. To effectively
evaluate the instability in portfolio
performance, senior managers, officers
and owners must define acceptable
portfolio concentrations in all three
risk types.
Among your peers, the more conservative factors tend to manage exposure
through restrictive line limits, debtor
limits, and maximum exposure by
industry. Some of your peers may also
limit geographical risk. Aggressive
factoring companies have customarily accepted large concentrations
of individual clients and industries.
Even further along the spectrum are
factoring companies that operate as
single industry specialists.
Because of the pain that continues to
linger from soft consumer spending
(retail), energy volatility (transportation), and real estate (construction
related), concentration management
has become the highest priority. Factors
must constantly monitor their risk
profile to determine if future growth
strategies are consistent with the
desired risk profile.
While Mr. McKinley’s research was
aimed at a broader landscape intended
to include all commercial lending, his
theory on risk strategy is more relevant
than ever in today’s factoring environment. Using McKinley’s same frame of
reference, factors should select a risk
strategy that is consistent with longterm objectives, matching portfolio
quality with desired performance.
Three risk strategies and
their cultures
One’s strategy selection is dependent
upon one’s appetite for risk. Making
this choice is usually not a formal
8 The Commercial Factor | Winter 2010
process among most factors, but it
should be. I always encourage factoring
companies to intentionally self-evaluate their perceived risk strategy:
Conservative risk strategy. A
conservative strategy is defined as
accepting relatively low levels of
transaction risk, inherent risk and
concentration risk. This strategy is
normally an indicator of a values-driven
culture.
Managed risk strategy. A managed
strategy is defined as accepting
relatively low levels of risk in two of the
three categories while tolerating higher
risk in one category. This is normally an
indicator of an immediate performance
culture.
Aggressive risk strategy. An
aggressive strategy is defined as an
acceptance of relatively low risk in one
of the three categories, with a more
aggressive risk position in the other two
categories. This is normally an indicator of a production driven culture.
Obviously, portfolio volatility may
increase depending upon which
cultural influences shape your decisionmaking. The aggressive strategy
requires more careful management
because it operates farthest from a
safe zone. If risk in all three categories
reaches high levels, a factor’s portfolio volatility becomes so great in a
downturn that access to capital, or debt,
and ultimately survival, can become a
material issue.
The chart below depicts a risk management standard and the response
percentages of those who agreed. Of
particular interest to me was the observation that managers in both segments
generally agreed that their respective
pricing matrix did not always correlate to the risk being underwritten or
managed. In other words, risk adjusted
pricing was not consistently enforced.
Managers also generally agreed that
their proprietary risk rating system was
not always an effective gauge of the risk
management workload on a specific
client. The labor (and costs) involved
in managing client specific risk did not
Percentage (%) Agreed
Standard
Bank Owned Non-Bank Owned
Availability of comprehensive data when
making Obligor Credit Decisions
100
75
Consistent Use of Risk Based Pricing
75
75
Use of Information Technology to
Manage / Mitigate Risk
50
75
Effectiveness of Risk Rating System
75
75
Sharing Experience with other Factors
over Problem Relationships
25
25
Regular updating of Credit Policy
75
50
100
50
Frequency of Portfolio Reviews
75
75
Formal Periodic Review of Client Performance
50
75
Merit versus Extraneous Considerations
when Making Credit Decisions
Yes, it is possible to be very successful
in any one of the three cultures. But
there is no such thing as “auto pilot”
when managing risk, considering that
managing risk is your business.
I regularly have the opportunity to
evaluate the risk management practices
of both bank owned and non-bank
owned (private) factors. Recently, I
conducted a casual survey with four
managers from each environment. I
compared several of their respective
standards relative to risk measurement, underwriting, operations, credit
approval, and risk ratings. Overall, I
found no significant difference in risk
management standards between the
two segments. That is not to say either
group couldn’t benefit from increased
risk management standards, rather that
there were equal concerns of inadequacy in each group.
The Commercial Factor | Winter 2010 9
always influence a risk rating.
The largest disparity between the
two came when I asked the question,
“are credit decisions ever based on
extraneous considerations?” Managers
of bank owned factoring companies
unanimously said no, while half of the
managers in private factoring companies said yes. Conversely, and perhaps
ironically, considering the presumption
that bank owned factoring companies
have a larger capital expenditure
budget, more managers from privately
owned factoring companies said they
felt their information technology was
effective in managing risk, as opposed
to simply housing data.
Risk management in the factoring
industry is an ongoing challenge.
Arguably, in the last 20 years, the risk
profiles of small ticket factoring clients
has not decreased, however, annualized returns per client has dramatically
dwindled. Long gone are the 60-75%
annualized returns of the early 1990s.
One thing is becoming clear for 2010.
Knowledge isn’t necessarily power.
Factors have unlimited access to
information and knowledge. Rather
it’s the willingness to act wisely and
decisively on that knowledge. There
is an unprecedented overflow of data
and outside influences for factors to
observe, assess and act upon. But in
today’s unusually dynamic economic
climate, I believe it will be the factor’s
willingness to proactively review its
practices and intentionally define
its risk management profile that will
secure its potential for sustained profitability. •
Vince
Mancuso is
the creator
of the Best
Practices
Review
at www.consultbluewater.com/
consulting. He is a risk advisor,
factoring advocate, and Managing
Director of the transaction advisory
firm Bluewater. He can be reached
at 801.508.2599 or vincemancuso@
consultbluewater.com
10 The Commercial Factor | Winter 2010
Debtor Quality in 2010
Managing concentrations and collateral as well as staying selective about the
account debtors in your portfolio may be the only way to operate in 2010. Put away
your dart board as a way to set debtor credit limits, the odds won’t be good if you
rely upon that method of credit approvals.
BY Darla Auchinachie
Managing concentrations and collateral as well as staying
selective about the account debtors in your portfolio may be
the only way to operate in 2010. Put away your dart board as
a way to set debtor credit limits, the odds won’t be good if you
rely upon that method of credit approvals.
For the 12 months ended September 2009, the U.S. Bankruptcy
Courts released that over 58,700 businesses filed for some sort
of Bankruptcy protection – mostly Chapter 7 & 11s. Within
the next month the Courts will issue a press release noting
the total number of BK filings for the year ended December
2009. 2008 in comparison for the full calendar year had a total
of 43,546 businesses filing for BK. For the 12 month periods
ending in September 2008 and 2009 – Business BK filings
were up to an uncomfortable extent. You can check out this
information and more yourself by visiting www.uscourts.gov
and searching for “Bankruptcy Statistics”.
Clearly 2009 will not be remembered as a smashingly
successful year: increased bankruptcies, the recession, an
economic crisis, the weakening of the dollar, the potential for
inflation, zero jobs growth for an entire decade, etc. I won’t
be going out on a limb here to say that debtor quality has
declined across the board. For sure, almost every factoring
company in 2009 experienced account debtors taking longer
to pay. In some cases, it is simply because the accounts are
holding onto their cash longer and still have the ability to and
every intention of paying their balances owed. Not all account
debtors have been so lucky; however, which is a problem for
both Non-Recourse and Recourse factoring companies.
Debtor quality has always been a focal point in factoring – we
couldn’t exist without continued analysis on account debtors’
financial strengths. Factoring wouldn’t be very successful, let
alone viable, if credit risk wasn’t managed accordingly. Even
though the focus of this edition of the Commercial Factor is
about debtor quality, I would be remiss if I did not point out
that debtor quality is only one piece of the risk management
puzzle. Managing concentration percentages and amounts
for account debtors and clients alike as well as the option and
availability of credit insurance protection or participations
play into the mix too.
Okay so I don’t know what 2010 is going to bring us – I don’t
know if we are headed for a double dip recession or if the
U.S. Economy can gain enough traction and continue to rise
above current conditions. There are positive signs so I hear on
the news and read in the press – Ford just announced a nice
increase in vehicle sales which bolstered their stock and oil
is trading at $83 a barrel as of this writing. There are negative signs too, most notably from the commercial real estate
sector not to mention the lingering effects of the burst housing
bubble. One thing is certain – account debtor credit will be a
challenge for some time to come.
The Commercial Factor | Winter 2010 11
Factoring companies operate in a
unique space where the mix of account
debtors can be as diverse as ranging
from large publicly traded companies
to small privately held entities. It is
one thing when the factor has access to
historical audited financial statements
to base availability decisions upon.
Quite another when clients wish to
sell invoices issued to customers who
for a variety of reasons are unable or
unwilling to provide adequate data for
credit approval or simply may not have
the historical activity to support the
amount of credit requested. Factoring
companies can achieve a successful
2010 by staying focused on debtor
quality and being selective. If the factor
cannot learn enough about an account
debtor’s financial strength to make an
informed credit decision it would not
be wise to take on very much exposure.
Of course Credit Analysis and Risk
Management is more than just
formulas and numbers which can be
found in financial statements. Most
everyone in this business knows the
Six C’s of Credit and that they should
be actively using each one for every
credit decision. There is no question
that financial ratios tell an important
story and are great indicators but we
should not forget that much can be
gained though managing collateral,
researching and understanding conditions and using some common sense.
You see, a factoring company’s
operating philosophy (specifically how
they manage their collateral) either
puts them in position to be proactive
or reactive. If the Factor requires and
maintains records which consist of
complete supporting invoice documentation and in addition makes
direct contact with account debtors
as to the payment status of purchased
invoices in a timely fashion, then by
effectively managing the collateral
they are also enhancing their chances
of payment on those invoices. There
are no guarantees in life or in factoring
- every Factor has probably experienced an account debtor filing for BK
unexpectedly. At least if the collateral is
properly managed then a factor might
become aware of debtor financial stress
early enough to stop the bleeding by
declining to accept new invoices for
purchase and not create additional
exposure.
Credit underwriting never ends in
factoring, once a credit limit is set
it should be revisited periodically –
some factoring companies reevaluate
account debtor credit limits with each
new invoice offered for purchase, not
a bad idea these days. This reevaluation includes a check in the trades
from multiple sources as well as how
the account debtor is performing with
existing clients. If the amounts warrant
it then whenever possible financial
statements should be analyzed to assess
current financial health as often as is
practicable.
Factors should stay attuned to the
economic conditions surrounding the
industries they purchase paper from
also. If the Factor is concentrated in the
oil fields, they will closely monitor the
price of crude oil as an indicator. If the
12 The Commercial Factor | Winter 2010
Factor is concentrated in transportation
they will pay attention to the retail price
of diesel. Obviously many Factors follow
the state of the auto industry closely. If
the Factor is concentrated with clients
selling into the retail sector they should
be monitoring sales and inventory
levels of the major retail stores. Credit
personnel must read trade magazines,
subscribe to online news providers like
Market Watch or Bloomberg – read the
Wall Street Journal daily – anything at
all that can keep them informed will
be powerful knowledge as we continue
to wade through an uneasy economy.
There is no silver bullet or crystal ball
but there are indicators if we just keep
our eyes open.
declining numbers which means lower
revenues for contractors and suppliers
alike. From a portfolio perspective,
Factor’s should be cautious and manage
exposure accordingly, never allowing
such high risk exposure to be a concentration within the overall portfolio.
Moreover, by taking common sense
into consideration, Factors know that
due to economic conditions they may
have to carry paper longer. This should
equal an increase in monitoring of
client financial health. Factors should
be concerned that the client can afford
the additional financing costs brought
about by a lengthening pay cycle.
Remain focused on overall portfolio
quality as well as debtor quality and
remain selective in the process of
purchasing invoices to marginal
debtors – this should be the mantra for
factoring in 2010. •
Factoring companies have to be able to
connect some dots too. Everyone knows
that residential real estate prices have
tumbled – what might this signify to
the Factor? Well for one, municipalities have seen their revenues decrease
because property taxes are reduced
due to the drop in home values. This
is a problem in states like Arizona and
Nevada, but not as much in Texas.
Factors would do well to limit exposure
to municipalities adversely affected by
these events. For another this means
that new construction projects have
Darla
Auchinachie
has been
actively
involved in
commercial
finance for some 17 years. She has
served as Operations Manager for
several national factoring companies
and has also established a solid
reputation as a consultant for
Factoring operations throughout the
US and Canada. Darla is a regular
speaker at IFA conferences and a
co-instructor for the Loan Officer
and Account Executive training
programs. Darla believes in a
business philosophy that espouses
education and “best practices”.
She regularly shares her experience
and expertise with others in the
Factoring community. Darla can be
reached at [email protected]
The Commercial Factor | Winter 2010 13
What Have We Learned?
The bubbles have burst. Housing was killed. The financial crisis was as stunning as it
was intense. So much so that for a quarter or so it was being compared to the Great
Depression of the 1930’s. While the numbers hardly tell the whole story, there are
plenty of lessons to be learned.
By Dr. Barry Asmus
Dr. Barry Asmus
is a speaker at
IFA’s 2010
Factoring Conference,
April 14-17,
Scottsdale AZ.
The bubbles have burst. Housing was killed. The financial crisis was as stunning as it
was intense. So much so that for a quarter or so it was being compared to the Great
Depression of the 1930’s. While the numbers hardly tell the whole story, there are
plenty of lessons to be learned.
First, is that institutions that combine equity funds, hedge funds and large proprietary trading, with traditional single purpose banking present an enormous conflict
of interests. Gambling with public money should be impermissible in the future. I
realize that everyone wants to become big enough to enjoy systemic risk protection,
but it must be significantly reduced.
Second, portfolio diversification, in particular, including a growth percentage
of investments in international stocks has a 30 year history. We now know that
diversification doesn’t always work. That trend will diminish because international
companies are more dependent on developed countries than was thought, i.e., not
as attractive as before. The de-coupling hypothesis is being severely tested. China,
however, might be the exception.
China has finally hit a tipping point, now bigger economically than Japan, with a 4.2
trillion dollar GDP. As China seeks to stabilize itself from the 2008-2009 difficult
world-wide recession, it has enormous resources to draw from, including owning
over a trillion dollars of U.S. Treasuries. The increasing integration of Chinese
policymakers with G-7 policymakers over the past year is an encouraging sign that
China, on balance, can be a stabilizing force in the global economy.
Another lesson is that just when everyone is crying for more transparency and
competition, many smaller and medium sized financial institutions will be absorbed
by the large financial conglomerates. They are the very ones that offered debt and
mortgage securitization and high risk derivative credit instruments. When a paralyzed financial system causes real activity to contract sharply, the financial condition
deteriorates even further. As capital flows to emerging markets dried up, growth fell
further in a negative feedback loop that reinforced panic. An acceleration of either
deflation or inflation right now would be an unnerving development for both the
central bank and financial markets. The price volatility in the financial asset industry
can be reduced if we return to single purpose banking. But that, naturally, should
be slow and gradual. A real recovery depends on government demand being supplemented by sustainable sources of private spending, in particular, entrepreneurial
capitalism.
An entrepreneur is someone who starts a business and who offers an innovative
solution to an unrecognized problem; someone who upsets and disorganizes;
someone who innovates; they are bold and imaginative deviators from established
14 The Commercial Factor | Winter 2010
business patterns; they pursue
opportunity beyond the resources they
currently control.
Entrepreneurial conferences are being
held the world over. A conference in
Bangalore, India for 1700 bright eyed
Indians had at least that many standing
in line to get in. They mobbed business heroes like Azim H. Premji who
transformed Wipro Technologies into
a software giant. Speaker after speaker
praised entrepreneurship as a powerful
force for doing good as well as doing
well.
Yes, entrepreneurship involves creative
destruction, often forcing some people
out of their jobs. But the much larger
effect is creative creation, and that
means productivity and jobs.
Just as a freeway sweeping thru a city
is a game changer for all property
owners, so are the untapped market
spaces, new demand creators, and the
new opportunities that will eventuate
in future growth. In just thirty years,
cell phones, gas-fired electric plants,
minivans, discount retailers, coffee
bars, and personal computers all
represent multi-billion dollar new
industries. The reality is this: it will
happen again. New industries will
be created and existing ones will be
re-created. Creative creation has always
been a stronger force than creative
destruction. Creating a leap in value for
consumers and clients will be a game
changer. Digital technology moving
at the speed of light permits low cost
production and product differentiation
to be accomplished at the same time.
The internet makes every worker and
every employee a producer. Never in
history has any of this been possible.
While the 20th century ended with the
vast majority of world population still
in poverty, the 21st will end with the
vast majority in relative prosperity.
We, the American people must stop
waiting for our leaders to fix our
economic problems, to reduce but not
eliminate risk, and realize that in every
crisis there is an opportunity. Although
most metrics are off right now, and
signs of uncertainty are high, it is nevertheless true that no country enjoys the
freedom and prosperity that we do. The
commercial factor industry has done
its own part to make it all possible.
Sticking to basics and paying attention
to policies, procedures and processes
is the right thing to do now. Looking
for and cultivating new business from
significant number of people familiar
with managing large sums of money in
hedge funds, big mortgage companies,
and venture capitalists and officers
in the real estate and banking worlds
present profitable challenges. Metrics
like monthly volume, the strength
of debtors, and the services a factor
provides need constant monitoring.
A good scare often teaches more than
good advice. Hopefully that is another
lesson learned. •
Dr. Barry
Asmus has
been named
by USA Today
as one of the
five most
requested
speakers in the United States. As a
Senior Economist for the prestigious
National Center for Policy Analysis,
Dr. Asmus does more than just
speak on policies, he is actively
involved with their implementation.
With over 25 years experience on
the speaking platform, Dr. Asmus
presents a powerful picture of
America’s future, both here and
abroad. Dr. Asmus is the author of
nine books. His latest is titled Bulls
Don’t Blush, Bears Don’t Die, and
provides an insightful summary of
today’s economy, the problems
facing it and proposed solutions
to these problems. Barry can be
reached at 480-596-3442.
Entrepreneurial capitalism bestows
tremendous benefits on countries that
allow old industries to by supplemented
by new ones. Yet the constant flux is
seldom welcome. People losing their
jobs and the disruption of watching
businesses close down is always
troubling. Yet governments constantly
attempt to block the process of creative
destruction, implementing policies to
save or serve the old. General Motors,
AIG, and General Electric are examples.
The Commercial Factor | Winter 2010 15
Factor Construction
Deals…And Sleep Soundly
at Night!
Many factors lack the c-c-c-courage needed to fund a construction deal. Preliminary
& Mechanic’s Liens, Payment & Performance Bonds, Progress Billing, and Retention,
OH MY! Follow me along the “Yellow Brick Road” to mitigate the common risks of
factoring construction deals.
By Steve Ontiveros
Actually, you don’t have to live in the fantasy world of “Oz”
to successfully navigate the unique risks found in a typical
construction deal. In fact, when you peel back the curtain
inside the “Emerald City Factoring Company,” you’ll find
that there are no wizards or wizardry going on at all. As
the Emerald City Factoring Company Wizard, I’ll show
you that you probably already have the tools necessary to
fund construction and still sleep well at night.
Preliminary Lien Notice & Mechanic’s Liens
A Preliminary Lien Notice is a formal document sent by
the contractor, sub contractor, material supplier, equipment lessor – and factoring company in some cases– to the
owner of the project. This “pre-lien” establishes the right
to file a mechanic’s lien later on down the road. If the prelien is sent and the claimant’s bill is paid, the pre-lien has
no further legal effect. However, if the bill is not paid then
the claimant may now file a mechanic’s lien on the owner’s
property. An active mechanic’s lien on a property ties
that property up, leaving it in a position that it cannot be
sold or transferred to another party until the mechanic’s
lien is released. Roughly 40 states in the US require a
preliminary lien to be present before a mechanic’s lien can
be enforced–check the laws in your state to see where you
stand.
The Emerald City Factoring Company often requires
its construction clients to provide evidence of a pre-lien
being sent to everyone up the food chain, including the
owners. In fact, Emerald City Factoring Company has
been known to file a pre-lien of its own to further protect
its position. True, Emerald City Factoring Company is not
a contractor, supplier, or equipment lessor. But, because
Emerald City Factoring Company has a blanket UCC1 on
all assets of the client, the factor is indeed a supplier of
material and equipment on the job. Even if the General
Contractor argues a factoring company has no legal
standing to file a pre-lien, the owner doesn’t care. The
owner will simply tell the General Contractor to ensure
16 The Commercial Factor | Winter 2010
all invoices are paid to all subcontractors so that the factoring company’s
pre-lien won’t magically turn into a
mechanic’s lien. Having the pre-lien
in place allows the Emerald City
Factoring Company to file a mechanic’s
lien if payment is not made, which
means the Wizards running the show
can sleep well at night.
Payment & Performance
Bonds
Performance bonds are used in the
construction industry as a tool for the
owner of the property being developed
to guarantee that the value of the
work will not be lost in the case of an
unfortunate event (such as insolvency
of the contractor.) A payment bond
guarantees that the contractor will pay
the labor and material costs they are
obligated to. Shoddy work, sub-standard materials, and corner-cutting put
Emerald City Factor’s factored invoices
at risk, because if the owner throws
your client off the job, the bonding
company can step in and finish the job
– and then back charge your factoring
client. It’s unlikely that a bonding
company will subordinate to the
factoring company, and thus the factor’s
lien on the receivables may be primed
by the big bad bonding company.
So, how do you prevent the Wicked
Witch of the West coming through to
spoil the party, kick your contractor
off the job, and call in the bonding
company to clean up the mess? Unlike
Dorothy, clicking your heels and
repeating “there’s no place like home”
won’t prevent the damage done by that
underperforming contractor factoring
client of yours.
Invite “Captain Obvious” to work for
the Emerald City Factoring Company.
He’s the guy that usually shows up after
the disaster struck, and is rich with
advice on what you should have done.
These are usually “DUH” moments but,
in retrospect, they were so obvious and
simple that you may have overlooked
them. Here’s what Captain Obvious has
taught us over the years:
• Have your contractor client share
the bid file with you. Go over each
scope with a fine tooth comb. Ask the
contractor to tell you what % gross
profit was built into each unique scope.
Use common sense to work out where
the estimate may be wildly optimistic.
Is there enough gross profit in the estimate for them to have “oh crap” room?
More importantly, is there enough
room in the estimate to cover the costs
of your factoring services?
• Ask about the job costing engine
that the contractor is using. Are they
plugging in the job budget before the
job starts, and then recording costs
against the original budget? Ask the
contractor how long it takes for their
AP accounting staff to enter job costs
against each job. The costs need to get
added to the job cost engine almost
immediately after they are incurred.
• Ask to be shown a copy of a recent
“over/under” billing report. This
report will show whether or not the
job is hemorrhaging cash as the job is
happening. If the job is over-billed, the
contractor is in a strong cash position
on the job. If it’s under billed, it means
the contractor has spent more on the
job than they have yet to bill. Running
jobs under billed for too long is probably what brought the contractor
to you in the first place, so don’t be
surprised to see this – just monitor it so
that you know just how bad the situation might be.
• If your contractor’s eyes gloss over
when you ask him about job budgets
and job costing and over / under billing,
then you might have a different sort of
problem on your hand. Without these
tools in place, the contractor will have
a tough time knowing whether or not
he’s profitable and whether or not he
has the longevity to complete the job.
Yes, even with factoring company in
place, there’s no avoiding disaster when
working with a contractor who doesn’t
watch his budgets.
• Get a hard hat and a vest with fashionable fluorescent reflective tape. Travel
to the job site at least once a week to
make sure progress is being made and
to be visible to your client. You’re in
luck if you have a pick-up truck and
even better if you have a pick-up truck
with a diesel fuel tank in the bed. This
way you can top off the heavy equipment on the job site so that they’re
ready for a full day’s use tomorrow!
• While at the job site, cozy up to the
project manager / superintendent
who is in charge of your client’s
performance. He’s usually the person
who will approve or deny the progress billing requests. Be up-front
with him and tell him that you’re the
“money guy” behind your client. Ask
the project manager regularly about
progress on the project. Are there dicey
issues that you can take up with your
client to make the job run smoothly?
• Be the guy that a) brings the donuts
and coffee into the planning meetings
and b) has a cooler full of sodas and
snacks for the laborers. Develop relationships with people on the job. Not
only are you looking after your investment, but you’re sure to get “insider”
information about the performance
of your client. Another added benefit
to being on the job site consistently?
More clients. As you’re talking with
the project manager, it’ll be no secret
what you do. I can’t tell you how many
clients Emerald City Factors has earned
as a result of job-site schmoozing.
• Most of all, be useful on the job site,
and then get out of there. Bring lunch to
the trades people. Ask your questions.
Get invoice approvals. Find out when
the city / county inspector is coming to
inspect your client’s work (and be there
for those inspections!) Do no harm.
• Require that your contractor provide
you with weekly job cost reports.
Measure the actual job costs against
the original job budgets. If you start
to see a budget getting to the end of
its life, investigate. Find out if there
are change orders that you don’t know
about. Maybe it’s just job cost entry
errors (costs being tagged to the wrong
element of the job). Don’t accept your
client’s word for it when he tells you
“I’m on time and under budget.” Expect
that he’s not, and verify with proof in
the job cost / budget reports.
Progress Billing & Retention
The c-c-c-cowardly Lion will tell you
that the contractual ability to off-set the
cost of defects or repairs against previously approved billings is what prevents
him from getting into the construction factoring game. In other words,
the Lion is afraid that even after the
general contractor approves an invoice,
somehow he or she can still legally
refuse to pay any or all of the approved
invoice. This is typically when retention comes into play. Retention is a
process by which the general contractor
The Commercial Factor | Winter 2010 17
will hold back usually 10% of a progress payment. This 10% is not paid
to the contractor until the end of the
job, when all the punch list items are
completed, and when the owner is
satisfied with the material and workmanship. Think of it as a “reserve”
account of sorts.
Be sure you understand that a progress
billing invoice may have retention – if
so, don’t advance against the full value
of the invoice. Gauge your advance
based on the invoice amount AFTER
retention is taken out. Don’t fund
unless and until you get the general
contractor to physically sign your
approval letter. Put language on your
approval letter that says something to
the effect of: “Invoice approved without
offsets or deductions” and then pray
that you don’t ever have to defend that
language - a costly adventure in the
American Justice System!
SERVICES LLC
A Leading Choice for Purchase Order Finance
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s Evaluates transactions and looks beyond
our client’s balance sheet.
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without having to sacrifice equity.
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and purchase order sizes.
s Supports both domestic and international
transactions.
Hartsko is a privately funded, closely held entity
with a strong financial foundation and is able to
react quickly to unique financing requests
in trade. We are not a bank! We offer
the speed and flexibility to get
deals done fast!
Hartsko Financial Services, LLC
214-18 41st Avenue
Suite 301
Bayside, NY 11361
Cell: 516-906-6682
18 The Commercial Factor | Winter 2010
Richard Eitelberg, CPA
President
Tel: 718-229-0440
Fax: 718-229-5428
E-mail: [email protected]
Distance Makes the Heart
Grow Fonder
Emerald City Factoring Company is
located in the Heart of Oz. Let’s say
that your construction client’s project
is all the way over in Kansas, so there is
no chance that you or your wizard staff
can visit the job site to protect your
investment and market to others on the
site. In that case contract with a broker,
or a construction manager, to visit the
site on your behalf. Get some eyes and
ears on the ground at the job site, and
be sure to review the budgets and job
cost reports on a regular basis. If you
want to get really creative, partner up
with a bookkeeper who is local to the
construction client and job site. Ask
that your construction client consider
using a chosen bookkeeper who knows
how to manage construction job costing
and billing. You’ll be singing the praises
of Glinda, the Good Bookkeeping Witch
of the North before you can say “there’s
no place like home, there’s no place like
home, there’s no place like home.”
The c-c-c-cowardly Lion
gets Courage
It’s always easier to get something done
when you have a little bit of experience. Dorothy didn’t get home without
taking a few calculated risks. Consider
funding a small deal, perhaps a spot
factor on a small project will give you
some practice but won’t cause you
to lose sleep. You can learn the lingo
of the contractor (and flatter your
client) by asking questions about the
business. Or, consider working with
non-competing factoring company who
does construction and let them teach
you the ropes.
Just watch, before long you’ll be
chanting in your sleep: “There’s no
factoring like construction factoring…”•
Steve
Ontiveros
has been
successfully
factoring
construction
deals for over 10 years. He can be
reached at (510) 223-1285 or
[email protected]
an inside look
What factor clients have to say
Q&A with Bob Adair
President, Construction EcoServices
In the business of storm water testing
and management, Bob Adair has worked
with Jim DiCamillo and the team at RMP
Capital Corp for more than two years.
IFA caught up with him at his Houston
office to get the back story on why his
45-person company, founded in 2002,
uses factoring.
companies that they work with. To
us, that meant they have a good sense
of how business flows for consulting
companies. Our business is a combination of consulting and construction
support. We’re not a company that has
a few invoices a month – we work with
hundreds of companies, and generate
hundreds of invoices. They know how
to do that business.
IFA: How did the factor assist you?
BA: It was like having a thousand
pound weight off of our backs! We now
have the funds we need to support our
growth and do our business.
IFA: Why did you choose factoring vs.
other types of financing?
BA: There is always a connotation with
construction that you’re a high-risk
borrower. We investigated asset based
lending and connected with the folks at
RMP as a result of our frustration with
the banking world. In our experience,
banks aren’t willing to work with small
businesses that actually grow. They’re
thrilled if you can draw down on your
line of credit and pay it back in 30 days.
But what happens if the volume of your
receivables increases from month to
month because you’re growing? They
don’t know what to do. I’ve sat down
with a bank and said, our growth is
ahead of schedule; we need to bump up
our $1 million line of credit after four
months instead of a year. And I heard,
‘We like to look at those things once a
year.’ That’s not going to help us.
IFA: How did you choose RMP Capital?
BA: After our experience with a series
of banks over the first few years of our
business, we started looking for alternatives – very carefully, because we were
moving out in unknown territory. Our
mind was eased by one of our largest
vendors, an East Coast $150 million
company. The guy who founded that
business told me he used an asset based
lender for his first 10 years in business.
We started researching on the Internet
and making calls. From our first conversation with Walter at RMP, we hit it off.
They came down and visited with us.
We’re very relationship driven. And the
people are outstanding and the service
we’ve gotten is light years away from
what we’ve ever gotten from a bank.
IFA: What’s important to you when
selecting a factoring company?
BA: Really we had to feel comfortable
that these were folks that would do
what they said they’d do. To the extent
that our receivables supported it, that
they were willing to bump the line of
credit as often as we needed it. Given
that their business is 100 percent
focused on doing exactly that, it was
easier to feel comfortable that they’d
live up to what they promised.
IFA: What’s most important to you in
the relationship?
BA: Many of the companies we talked
to were construction oriented factoring
companies. RMP has a piece of their
business in that area, but they also
have a huge portfolio of consulting
IFA: Has the relationship been a good
one?
BA: The relationship has matured over
time. In the early days, there was a level
of oversight that we struggled against a
bit. The good news about developing a
relationship is that as they’ve become
comfortable with your client base, they
relax that level of oversight.
IFA: By increasing your cash flow, did
you accomplish your goals (growth,
survive, etc)?
BA: Absolutely. And the process has
also helped us manage our receivables
far better. In the first year we really
tightened up on how we deal with
receivables. Since they ultimately
belong to us, it behooves us to make
sure they’re collected. That’s been a
real benefit -- it was an area in which we
were operating too loosely.
IFA: Would you recommend factoring
to other companies in your situation?
BA: We have recommended RMP many
times – to anybody who wants to listen.
There’s a premium to be paid for the
service that asset based lenders provide,
but frankly it’s not that much more than
a bank charges. The benefit more than
compensates for the cost. •
The Commercial Factor | Winter 2010 19
what’s new at ifa
The 2010 IFA Annual Conference Speakers are Sure to Impress
By Heather Villa
Communications Director, IFA
The IFA’s Annual Conference, to
be held April 14 through April 17 in
Scottsdale, Ariz., is a must-attend event
in order to connect to industry experts
and gain critical insights into managing
and growing your portfolio. The world’s
largest meeting dedicated to banks and
finance companies that offer financing
through factoring, this year’s conference provides plenty of educational
material from beginner to advanced,
domestic to international, officer to
president and all levels of employee
groups.
The Speakers & Sessions
Changes are occurring in the world
of finance and factoring. The 2010
IFA Annual Conference has the most
relevant topics for the factoring and
commercial finance industry. This
year’s conference will showcase our
largest and most comprehensive group
of topics and speakers to date.
Dr. Barry Asmus (Ideas Spoken, Inc.)
has been named by USA Today as one of
the five most requested speakers in the
United States. As a senior economist
for the prestigious National Center
20 The Commercial Factor | Winter 2010
for Policy Analysis, Dr. Asmus does
more than just speak on policies; he
is actively involved with their implementation. With more than 25 years of
experience on the speaking platform,
Dr. Asmus presents a powerful picture
of America’s future, both here and
abroad.
Barry Minkow (Fraud Discovery
Institute) made headlines for being the
youngest person in United States business history to take a company public
through an S-1 registration statement
before he was 21 years old. However, his
company, ZZZZ Best Co., Inc. (which
at one time had a $300 million public
stock evaluation) was built on fraud
and deceit. He amassed more than $20
million in loans from 15 different banks,
including three investment banks
and several private individuals – all
for a company whose actual revenues
were 90 percent less than what they
reported and which never earned a
profit in the five years it was in business
(October 1982 to July 1987). Minkow
speaks to executives and investors alike
about the dangers of corporate fraud
and the techniques criminals use to
deceive victims. As an expert on fraud,
he has appeared on national television
networks including FOX News, FOX
Business, CNN and CNBC.
Mac Fulfer, Esq. (Amazing Face
Reading) has workshops that are in
great demand from lawyers, educational institutions and other venues
– any group that has an interest in
understanding other people better.
As a presenter, Fulfer relies on his
background, personal experience,
wisdom and expertise in face reading to
provide participants with information
and experience that will enhance their
communication skills. Learn how to
improve your negotiating, hiring and
selling skills, increase your ability to
communicate, gain insight into unique
personality traits and identify character
strengths and challenges.
Robert A. Zadek, Esq. is one of the
premier attorneys and an expert in
the field of factoring. An attorney with
the San Francisco office of Buchalter
Nemer, he handles loan documentation,
trade finance and letters of credit, loan
workouts and bankruptcy. This year he
will give a Report From the Courts and
tell you how you and your friends made
out. Find out the lessons to be learned
from this year’s court decisions.
Mike Ullman, Esq. is a principal and
shareholder of Ullman & Ullman, P.A.
He graduated from Nova University
Magna Cum Laude. He has been
actively practicing in the areas of
factoring and asset-based lending for
more than 21 years. Ullman is a member
of the Florida and American Bar
Associations as well as the Bankruptcy
Bar Association for the Southern
District of Florida. He will be speaking
about Advanced Due Diligence Issues
and underwriting considerations from
soup to nuts that even the smartest of
you have most likely overlooked.
Darla Auchinachie has been actively
involved in commercial finance for
about 17 years. She has served as
operations manager for several national
factoring companies and has also established a solid reputation as a consultant
for factoring operations throughout the
United States and Canada. She speaks
again this year on the topic of Factoring
101, designed specifically to assist those
newer to the factoring industry.
Debra Wilson (Vertex Financial)
has been in the commercial finance
industry since 1980 and has a wide
range of experience in management,
commercial credit and collections,
auditing and marketing. She will
be giving an introduction to Credit
Monitoring.
David Jencks, Esq. (Jencks & Jencks)
is an attorney specializing in working
with transportation factoring specialists and factors with transportation
portfolios. Jencks is currently a
member of the South Dakota State Bar
Association and is also a member of
the American Bar Association. He will
be speaking about current topics in
Transportation Factoring.
Jeffrey Alpert, Esq. (Torkin Manes
LLP) acts for banks and other lenders in
commercial loan transactions secured
by real estate and personal property.
He has expertise in asset-based
lending, including receivables purchase
financing. His practice also includes
corporate and business law. Alpert
co-chaired a program titled, “Practice
Makes Perfection: Taking Security
for Lenders and Suppliers” presented
by The Law Society of Upper Canada,
Continuing Legal Education. He has
also written and spoken on the topic of
purchase money security interests. At
the conference, Alpert will be speaking
about Factoring in Canada.
Kwesi Rogers (Federal National
Payables) and Leslie Polt, Esq.
(Adelberg, Rudow, Dorf & Hendler,
LLC) are teaming up to give the low
down on Factoring Government
Receivables. As government spending
increases, an opportunity is created
for the factoring industry. Learn how
to take advantage of this by increasing
your knowledge on how to purchase
Government Receivables. Rogers has
been with Federal National since 1992.
Polt has advised banks, commercial
factoring companies, asset-based
lenders, leasing companies and other
institutional clients.
and operate like a large corporation. It can also assist larger factors
to streamline their operation and
operate more efficiently and cost
effectively. This panel will consist of
Robert Bernfeld (President, America’s
Factors, Inc.), Stewart Chesters (CEO,
Bibby Financial Services, Inc.), Ryan
Jaskiewicz (President, K & L Finance
Company, LLC) and the moderator
will be Cole Harmonson (President,
Far West Capital).
Structuring Participations
Panel – Participations are a useful
tool allowing a factor to increase its
portfolio size while shedding risk.
Participations may be either bought
or sold. This panel will consist of
Max Eliscu (President, LSQ Funding
Group), Harvey Friedman (President,
Lenders Funding, LLC), Pat Haney
(President, Crestmark Commercial
Capital Lending) and the moderator
will be Allen Frederic (President, Gulf
Coast Business Credit).
Topical Legal Issues Panel – This
panel will be discussing legal issues
facing factors under today’s economic
environment. The panelists are John
Beckstead, Esq. (Attorney, Holland
& Hart, LLP), Steve Kurtz, Esq.
(Attorney, Levinson, Arshonsky &
Kurtz) and the moderator will be Bill
Elliott (Senior Vice President, Bay
View Funding).
International Factoring Panel –
This panel will be discussing how the
world is getting smaller and describing
different ways for you to keep your
client’s domestic accounts and refer
the foreign. The panelists that we have
selected thus far are Anita Aedo from
ExpoCredit, LLC, Gary Mendell from
Meridian Finance Group and Ian Varley
from Bibby Financial Services, Inc.
Factoring Jeopardy – Jeopardy is
“America’s Favorite Quiz Show”. In
our version of Factoring Jeopardy,
you will be given the opportunity to
pit your factoring knowledge against
other players and win valuable gifts
and prizes. Join our host, Brian Van
Nevel (Spectrum Commercial Services
Company) as he selects contestants
from the audience, giving everyone a
chance to participate.
Small Factors Roundtable –
Factoring companies that fund clients
with low sales volumes operate in
a unique manner. This roundtable
discussion is designed to give this
important segment of our industry a
forum to discuss challenges and learn
from peers. The moderators will be
Jeff Callender (President, Dash Point
Financial Services, Inc.), Darrell Fleck
(Managing Partner, RMJ Capital, Inc.)
and David Jencks, Esq. (Attorney,
Jencks & Jencks, P.C.).
Time for a Break
Whether you want to meet up with old
acquaintances or connect with new
business colleagues, make sure to take
advantage of the networking opportunities at the conference.
Wednesday we will be offering
two optional activities. The Golf
Tournament will be held at the
Fairmont’s golf course, TPC Scottsdale.
Set in the Sonoran Desert and
surrounded by the majestic McDowell
Mountains, TPC Scottsdale, a PGA
TOUR Facility, embodies the standards
Technology Panel – If used correctly,
technology can be a great equalizer.
It can assist small factors to look
The Commercial Factor | Winter 2010 21
what’s new at ifa
of excellence in golf operations
worldwide. If you aren’t a golfer, then
make sure and sign up for the Hot Air
Ballooning excursion. The Sonoran
Desert is one of the foremost Hot Air
Ballooning areas in the entire world.
Don’t miss this opportunity to see why!
Fly over the beautiful desert and see the
wildlife that is out for the day.
We will also be offering an optional
training class on Wednesday for
Portfolio Management. This seminar
is focused on sharing best practices
employed by seasoned factoring
companies. Learn about the tools these
factors use which have helped them
build and manage a portfolio that is able
to weather tough times. Lead by Darla
Auchinachie (Consultant) and Marc
Marin (Managing Director, Gateway
Commercial Finance, LLC), this class
is a must in order to learn more about
how to manage a successful factoring
relationship.
Wednesday evening, the conference
officially kicks off with the RMP Capital
Welcome Reception from 5:30 to 7:30
p.m. at the Fairmont’s Hacienda Plaza.
The Welcome Reception is designed to
give Factoring Conference attendees
an opportunity to socialize with other
participants and vendors.
Thursday we have put together a Guest
Tour from 9 a.m. to 3:30 p.m. We will
begin our day at The Heard Museum.
The Heard Collection celebrates more
than 75,000 stunning examples of
American Indian art. After lunch, we
will be visiting downtown Scottsdale,
which elevates the sport of shopping to
new levels. With more than 5,500 retail
stores, malls, boutiques and outlets,
serious shoppers know that Scottsdale
is the place to be for the country’s finest
retail therapy.
Thursday evening conference attendees
and their guests can socialize at the
Bibby Social from 5:30 to 7:30 p.m.
The Social will take place at the East
Pool at the Fairmont. Food, drinks and
entertainment will be provided.
New this year will be a Dessert
Reception hosted by 20/20 Tax
Resolution from 9 to 11 p.m. The
reception will be at La Hacienda at the
Fairmont. End the night with some
delicious desserts and drinks with
22 The Commercial Factor | Winter 2010
colleagues and peers. Entertainment
will also be provided.
Friday evening will be our Banquet
Dinner from 6:30 to 10 p.m. Attendees
can kick up their heels at the Crown
“P” Corral, a full-blown frontier town
on the property of the Fairmont. Join
this informal event allowing Factoring
Conference participants to network in a
casual setting. Appetizers and cocktails
will be served followed by dinner.
Entertainment will be provided.
Saturday we will be having our popular
Roundtable Discussions from 9 a.m. to
12 p.m. The Roundtable Discussions has
been one of the most popular events of
the Factoring Conference. This event
brings together small groups who have
a common interest in a particular issue.
During the course of the morning, you
will explore continuing and emerging
opportunities and issues in an environment that provides both formal and
informal opportunities for sharing
ideas. Attendance to the Roundtable
Discussions is included with your
conference registration.
If you have never visited Sedona, Ariz.,
then the best way to see it is by jeep.
An optional activity on Saturday is the
Sedona Jeep Tour from 7:30 a.m. to 4:30
p.m. This interpretive adventure begins
as you travel through spectacular
canyon lands with towering red rock
formations. Explore the mystery and
capture the history of a 700-year-old
Sinaguan cliff dwelling. Your guide will
reveal the customs, myths and legends
of our native ancestors as you walk
through the ruin site. Become part of
a historical culture on this intriguing
archeological adventure.
Whether your goal is strictly for
educational purposes, or you just want
to broaden your factoring networks,
the 2010 IFA Factoring Conference
will help you achieve both. With an
excellent array of speaking sessions
and numerous opportunities for
networking, you can’t afford to miss out
on the NUMBER ONE event for factors
and commercial finance companies!
For more information and to register,
visit www.factoringconference.com or
call the IFA at 800-563-1895. •
IFA CALENDAR
OF EVENTS 2010
March 2: Luncheon Meeting With
NY Institute of Credit
Arno Ristorante, New York, NY
April 14-17: 2010 Factoring
Conference
Fairmont Scottsdale, Scottsdale, AZ
June 3-4: Account Executive &
Loan Officer Training
Treasure Island Resort & Casino,
Las Vegas, NV
June 7-8: The Law & Business
of Factoring
Treasure Island Resort & Casino,
Las Vegas, NV
July 15-16: How to offer
PO, LC & Inventory Financing
Treasure Island Resort & Casino,
Las Vegas, NV
August 26-27: Transportation
Factoring Meeting
Intercontinental Kansas City
at the Plaza, Kansas City, MO
October 6-8: Fraud Detection
& Monitoring Techniques
Rio All Suites Hotel & Casino,
Las Vegas, NV
October 14-15: Small Factors
Workshop
Rio All Suites Hotel & Casino,
Las Vegas, NV
November 4-5: Sales & Marketing
Rio All Suites Hotel & Casino,
Las Vegas, NV
For details about IFA
2010 events, please visit
www.factoring.org
OTHER
INDUSTRY
EVENTS
May 18-20: Commercial Finance
Association Entrepreneurial
Finance & Factoring Conference
Dallas, TX www.cfa.com
AFA Members &
Donations
Double Platinum Member ($10,000+)
Your Support Will Make A Difference
Bibby Financial Services, Inc.
First Capital
International Factoring Association
Recent Bill Could Detrimentally Impact Our Industry
The American Factoring Association (AFA)
was founded in August 2009 with the
sole purpose of educating the public and
policymakers on the availability of working
capital for financing America’s small
businesses and to conduct efforts in support
of increasing working capital financing. It is
a non-profit 501 (c) 6 corporation.
We believe that the timing for the creation
of this association could not have been
more prophetic. With the current economic
situation and impending legislation on the
financial sector, the Factoring industry’s
future is facing threats and possible changes
unlike anything in the past.
With the recent bankruptcy filing by CIT,
the Factoring industry will face increased
scrutiny. That coupled with the fact the
Timothy Geithner recently stated that
“non-bank lending now exceeds traditional
bank lending in the United States”, Factors
may soon be looked at with an eye towards
regulation. This may come in the form of
direct regulation or by controlling the flow
of capital into specialty finance companies
such as Factors. It is entirely feasible that
the flow of capital from banks to factors
could be regulated or restricted.
In our discussions with law firms, we have
learned that there is a bill currently being
written that will directly and detrimentally
affect the Factoring industry. Multiple law
firms have indicated that it is time critical
for the Factoring industry to do something
soon, as the Regulatory Reform Bill would
be pushed right after Healthcare.
org to distribute information about the
AFA. We will also be using services of the
International Factoring Association to
disseminate information.
Platinum ($5,000 - $9,999)
Allied Affiliated Funding
Crestmark Bank
D & S Factors
Gulf Coast Business Credit
J D Factors
Give us Your Ideas – If you have any ideas
or suggestion for the AFA please use the
website to “Submit Your Idea” to us.
Gold ($2,500 - $4,999)
We are also soliciting help from those
companies that are affiliated with the
Factoring Industry. We have set up three
classes of membership:
Apex Capital, LP
Far West Capital
Federal National Payables, Inc
Great Plains Transportation Services
Interstate Capital Corporation
Lenders Funding, LLC
Prime Financial Group
PRN Funding, LLC
Riviera Finance
TBS Factoring Service, LLC
Vertex Financial Corporation
Active Members: Individuals, firms
or corporations regularly engaged in
the business of factoring in the United
States and committed to the purposes
of the Association are eligible for active
membership.
Associate Members: Other individuals,
firms or corporations who have an
interest in the business of factoring and
are committed to the purposes of the
Association are eligible for membership.
Associate members are not entitled to vote.
Silver ($1,000 - $2,499)
Allied Members: Other individuals, firms
or corporations who are committed to the
purposes of the Association are eligible
for membership. Allied members are not
entitled to vote.
Again, this is a very serious time and we
hope that we can count on support from
everyone that is involved in the Factoring
industry. There is no other organization that
will represent and provide a united voice in
Washington for the Factoring industry.
The board of the AFA is preparing to make
a concerted effort to defend the Factoring
industry. There are various ways in which
you can currently help:
The board of the American Factoring
Association would like to thank you for your
help and donations.
Donate Money – Lobbying will be
required to affect legislation, and it is
not inexpensive. We expect a concerted
lobbying effort in Washington will cost
approximate $200,000 dollars per year. We
need your help. You can donate by visiting
our website at www.americanfactoring.org
Allen Frederic, President
Gulf Coast Business Credit
Pat Burns, Vice-President
Primary Funding Corporation
Debra Wilson, Secretary
Vertex Financial Corporation
Brian Van Nevel, CFO
SPECTRUM Commercial Services
Bert Goldberg,
Board Member/Executive Director
International Factoring Association
Bob Zadek, Esq., Board Member
Buchalter Nemer
Ivan Baker, Board Member
United Capital Funding Corporation
Donate Time – We will need a concerted
effort to educate the lawmakers on the
Factoring industry. We would like to present
a unified message to the lawmakers and are
working on how that message should be
delivered. If you have any ties to lawmakers,
please let us know.
Stay informed – We will be using the
new website at www.americanfactoring.
Sincerely,
Advance Business Capital
AGR Financial, LLC
Capital Solutions
Commercial Finance Consultants
Factors Southwest
Hartsko Financial Services, LLC
Maple Trade Finance, Inc.
MP Star Financial
Paragon Financial Group, Inc.
Primary Funding Corporation
Prosperity Funding, Inc
RMP Capital Corp.
Ullman Ullman, P.A.
United Capital Funding Corp.
Working Capital Company
Bronze ($500 - $999)
Abingdon Business Capital
Associated Receivables Funding, Inc.
CapFlow Funding Group
Capital-Plus, Inc.
Cash Flow Resources, LLC
Commission Express National
Concept Financial Group
DB Squared, Inc.
Global Technology Finance
K & L Finance Company, LLC
Spectrum Commercial Services Company
Venafin Factoring Services
Other (Under $500)
Cash Flow Financial, LLC
Saint John Capital Corporation
The Commercial Factor | Winter 2010 23
sales and marketing
BY Thomas G. Siska
Debtor Credit: Important
Now More Than Ever…
Years ago, your prospect says that
he prints annual reports for the Wall
Street giants, or he makes widgets for
the Big Three, or his sole client is the
State of California and you jump for
joy! Today, names like Bear Stearns,
Lehman Brothers, Chrysler, General
Motors and yes, the great State of
California may cause one to jump off
a cliff. While Debtor Credit has always
been the driving force behind the
Factoring Industry, it has never been as
difficult to attain and understand the
information surrounding your debtors
as it is now. For this reason, salespeople
too must focus on this aspect more
than ever. And one can no longer take
for granted that a BIG named debtor is
creditworthy. No firm or governmental
body is beyond scrutiny.
It All Starts with a Look at
the Aging
Forget the names. If the debtors are
paying late, there simply is not a deal
here. Companies pay slow for a reason.
And the reason is either that they have
no money or there is a problem with
the invoicing. You don’t care which it is
because Factors don’t like debtors short
on cash or collateral that has issues. And
to think that you can somehow magically fix either is not prudent. Again, the
prospect will have plenty of other things
wrong with it. That is why they are
talking to a Factor to begin with. Those
hurdles will be tough enough to clear.
But adding a brick wall (poor paying
invoices) will surely end this chase.
Don’t Assume Anything
Yes, those big names mentioned earlier
are all trouble today. But they’re not
alone. AIG, Freddy Mac, Fannie Mae,
Citigroup, Sears, Macy’s, all the major
Airlines (save Southwest), many
States with billion dollar plus budget
deficits, the Temporary Industry, the
Transportation Industry, etc. are all
teetering on the brink. Big foreign
corporations aren’t faring any better.
The entire country of Iceland is
24 The Commercial Factor | Winter 2010
bankrupt. No matter where you go you
must proceed with caution. And these
are the ones we can see.
Worse yet are some of the everyday
names that went private over the past
several years and therefore no longer
publish their financial statements.
Mark IV Automotive went Chapter 11
last April/May with D&B still saying
they were a solid payer “conservatively”
worth seven-figures of unsecured trade
credit. Oops. For those who do business
in Canada, the largest retailer and the
oldest corporation in North America,
Hudson Bay/Zellers, also went private
a few years back. Again, financial information is no longer available. Relying
on D&B alone for $50,000 in credit
may be OK. But seven-figure credit
lines need more than a credit report.
So if you’re hunting for big game (large
debtor limits), bring more than just a
hunting knife. Let your prospects know
that a thorough credit analysis will be
necessary. And you know something?
Today they just might find VALUE in a
Factor’s credit expertise!
Back to an Old Friend:
Diversification
Most seasoned factors made a lot of
money off of single-debtor concentrated clients. While there is still quite
a bit of this going on, it is certainly not
as popular as it once was. Not only is
debtor credit an issue, but so too is
performance risk. Debtor firms are
no longer capable of tolerating and
paying for products or services that
did not meet with their expectations.
Dilution is up with no end to the trend
in sight. In reaction to this new reality,
factors are demanding, more and more,
some minimal level of diversification
in the debtor base. And if they can’t
get diversification, then higher quality
client credit, more collateral, better
guarantors or some combination of
these elements must be substituted.
I hear quite often the phrase “My shop
is getting so conservative that I can’t get
anything funded!” Yet, as hard as it is to
believe, there really hasn’t been much,
if any, rise to “overall credit quality” in
the Factoring Industry. What’s really
been happening is as certain elements
of the relationship have deteriorated
(debtor credit, dilution, client profitability), there has arisen a need to
offset the negative balance with some
higher quality characteristics. So it’s
not so much a push towards becoming
conservative as much as it is a desperate
desire to at least remain even on the
credit scale.
Conclusion
The world has changed dramatically
in the past eighteen months. So too
have Factors. They have become more
diligent in their underwriting of both
clients and their debtors. Therefore,
salespeople must too! Ask any credit
person or owner. They have never
worked harder for less reward. So credit
isn’t trying to punish sales, they’re just
spreading the misery evenly!
The moral to most lessons regarding
sales is the same: you can put lipstick
on that pig, but it will always be a pig.
And while one person is wasting time
trying to pretty it up, another is wisely
moving on as quickly as possible to see
what other prey is out in the market.
Time marches on. 24 hours in a day, 7
days per week and 52 weeks per year is
all we get. It’s how we use that time that
separates the wheat from the chaff. •
Thomas
G. Siska is
President
& CEO of
Working
Capital
Solutions, Inc.,
a subsidiary
of WebBank.
Tom is a 24 year industry veteran
who has built several factoring
operations. He can be reached at
[email protected] or
847-297-3673.
Drafting Extra Protection
for Your Factoring Deals
Factors sometimes forget that at its core, factoring is about collecting from
account debtors. Too many times, factors rely on recourse provisions, personal
guaranties and reserves to protect them from losses. Unfortunately, it is not
uncommon to have a deal where you are having trouble collecting from account
debtors and you suddenly realize that you have serious exposure.
By Scot pierce
Factors sometimes forget that at its
core, factoring is about collecting
from account debtors. Too many
times, factors rely on recourse
provisions, personal guaranties and
reserves to protect them from losses.
Unfortunately, it is not uncommon
to have a deal where you are having
trouble collecting from account
debtors and you suddenly realize that
you have serious exposure. You then
discover that you are underreserved.
You call your client only to learn that
he or she has no more invoices to
advance and is in dire financial trouble.
What do you do?
Your only options may be to write the
debt off or file a lawsuit. If you can find
a solvent defendant, filing a lawsuit
may be the better option. You know
that one of primary maxims of litigation is to go after the deep pocket so
you sue everyone and see who is able
to pay. Then the account debtor does
what every account debtor who has not
paid an invoice does–he or she argues
offset. The account debtor claims that
your client breached the contract,
failed to deliver the goods in a timely
manner, the work was faulty, and so
forth. Although your due diligence
should have caught these problems,
many times the due diligence was not
as clean as you had hoped. Maybe you
did not quite ask the right questions,
or the account debtor’s response was
not as clear as you originally thought or
you asked the wrong person. Usually,
whether these excuses can be overcome
depends on the facts of the case. But
what besides perfect due diligence
could you do in the future to put yourself in a better position to litigate these
kinds of situations?
One possibility is having your client
obtain signed waiver of defense clauses
from account debtors. A waiver of
defense clause is essentially a clause
where an account debtor specifically
waives any defenses to payment for
offsets and the like. This is different
from a clause stating that the account
debtor is not aware of any claims or
offsets. You want the account debtor to
specifically waive any defenses, not just
agree that they do not currently know
of any defenses.
These clauses seem to be a hot topic
with courts in the last few years.
If executed correctly, courts have
generally been enforcing these
clauses. Uniform Commercial Code
section 9-403 sets out the standard for
enforcement.
(b) . . . [A]n agreement between an
account debtor and an assignor not to
assert against an assignee any claim or
defense that the account debtor may
have against the assignor is enforceable by an assignee that takes an
assignment:
(1) for value;
(2) in good faith;
(3) without notice of a claim of a property or possessory right to the property
assigned; and
(4) without notice of a defense or claim
in recoupment of the type that may be
asserted against a person entitled to
enforce a negotiable instrument under
section 3-305(a).
(c) Subsection (b) does not apply to
defenses of a type that may be asserted
against a holder in due course of a
negotiable instrument under Section
3-305(b)
Most states have adopted a version
of the uniform commercial code that
is very similar if not identical to the
uniform rules above. Before drafting
a waiver, however, always check the
relevant state’s specific version of this
section.
The benefit of these clauses is that
they offer numerous protections
for factors. When enforceable, the
waivers generally prevent account
debtors from asserting any defenses
other than infancy, duress, lack of legal
capacity, illegality of the transactions
that, under other law, nullifies the
transaction, fraud in the inducement
and discharge in insolvency proceedings. Simple contract defenses are not
available. Because of this, courts have
rejected a number of normally viable
contract defenses as a matter of law.
For example, courts have rejected the
following defenses:
(a) failure to properly install
equipment;1
(b) failure to properly attach all necessary schedules to the contract;2
(c) the parties never having a meeting of
the minds on the contract;3 and
(d) material alterations voiding the
contract.4
Other defenses have also been rejected
by courts.
Strong policy supports enforcing
these waivers. While evaluating a case
involving a waiver of defense clause
where payments on a finance lease
were assigned and securitized, the
California Fourth District Court of
Appeals stated “[S]ecuritization is
the modern version of the historical
The Commercial Factor | Winter 2010 25
practice of financing by factoring in
which a factor bought a creditor’s
accounts by paying a percentage of the
face value and receiving an assignment
of the accounts. Enforcing a waiver of
defenses, save for those that would be
good against a holder in due course
of a negotiable instrument, promotes
the transfer of accounts by allowing
a purchaser to rely on the face of the
documents. Thus, the lessee, like the
maker of a negotiable instrument,
bears the risk of putting into the
stream of commerce documents that
appear regular on their face but have
underlying flaws.”5 It may be helpful to
remind your judge of this policy if you
end up attempting to enforce one of
these waivers in court.
To take advantage of these waivers,
ensure that your waiver meets the
requirements of Article 9. First, the
clause should be between your client
and the account debtor not you and the
account debtor or you and your client.
One of the primary requirements in
enforcing waiver of defense clauses
under section 9-403 is that the agreement be between an account debtor
and assignor. In 2002, the Ohio Court
of Appeals considered a case where
a factor was attempting to enforce a
waiver of defense clause.6 The Court
specifically refused to enforce the
clause because it was executed between
the factor and the account debtor,
not the client and account debtor as
required by Ohio’s version of section
9-403. But what happens if your client
does not have a waiver of defense
agreement with the account debtor, but
you want to enforce this type of clause
directly with the account debtor?
In that situation, courts have used
state contract law principles rather
than the Uniform Commercial Code to
determine if the agreement is enforceable. The usual problem with enforcing
an agreement directly between the
factor and account debtor is that the
account debtor claims that it received
no benefit from signing the waiver so
the waiver is unenforceable. In August
of 2009, the Third Circuit Court of
Appeals considered a case where an
account debtor presented as a defense
to a factor’s attempt to enforce a waiver
of defense clause.7 The account debtor
argued that the waiver lacked consideration because the account debtor
26 The Commercial Factor | Winter 2010
received no benefit by signing it. The
Court rejected this argument and held
that the account debtor did receive a
benefit from signing the waiver. The
benefit that the Court found was that
the account debtor signed the waiver
to facilitate the factor’s client receiving
financing. This financing enabled the
client to perform its obligation for the
account debtor sooner which benefitted
the account debtor. That was enough to
render the waiver enforceable.
In 2002, however, the Ohio Court of
Appeals declined to enforce a waiver
of defense clause between a factor and
an account debtor because it found
no benefit to the account debtor.8 The
Court rejected the argument that the
waiver of defense clause should be
enforced under contract principles.
The Court found that the agreement
lacked consideration since the account
debtor received no benefit from signing
the waiver. Unfortunately, the opinion
does not tell us if the parties set forth
any theories of consideration. But the
lesson is that although an agreement
between the client and account debtor
is the most effective way to execute an
enforceable waiver of defense clause, a
properly executed agreement directly
between a factor and an account debtor
may also be enforceable.
Finally, it is worth emphasizing that
the factor itself must qualify under
section 9-403 to receive the benefit
of the waiver. The factor cannot know
there is a performance problem before
it accepts the invoice, then attempt to
enforce the waiver. The Dallas Court
of Appeals considered a situation
like this in 2008.9 The court rejected
enforcement of a waiver of defense
clause because the factor essentially
participated too much in the transaction. The court found that the factor
knew its client was having performance
problems, knew of problems with the
leases underlying the transaction, and
knew that the client may have difficulty
performing under the lease. Because
of all of this, the court held that factor
did not take the assignment in “good
faith without notice of a defense” and,
therefore, could not qualify for protection under article 9.
If drafted and executed properly, waiver
of defense clauses can be valuable tools.
Although these clauses may not solve
every problem, they can add another
layer of protection in your deals. They
may be especially helpful in those situations when your client wants to tender
you replacement invoices to make up
for uncollectible invoices. Whether a
court will enforce the clause, however,
may not be the waiver’s only value. Just
the existence of a well drafted clause
that appears to be enforceable may be
enough to create the leverage you need
to get paid. And the bottom line is that
you are in the business of collecting
from account debtors. •
Popular Leasing USA, Inc v. Mortgage
Sense, Inc., 2008 WL 1952380 (Cal. Ct.
App. 2008) (Nonpublished/Noncitable).
1
Wells Fargo Bank Minnesota, Nat’l Ass’n
v. B.C.B.U., 49 Cal. Rptr. 3d 324 (Cal. Ct.
App 2006).
2
3
Id.
4
Id.
5
Id.
Capital City Fin. Group, Inc. v. MAC
Constr., Inc., 2002 WL 2016332 (Ohio
Ct. App. 2002).
6
Hunts Point Coop. Mkt., Inc. v. Madison
Fin., L.L.C., 2009 WL 2700169 (3rd Cir.
2009).
7
8
Capital City Fin. Group, Inc., 2002 WL
2016332.
IFC Credit Corp. v. Specialty Optical
Sys., Inc., 252 S.W.3d 761 (Tex. App.Dallas 2008, pet. denied)
9
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
rights issues. He can be reached at 817-339-2474 or
[email protected].
Accounting Techniques
for Factors – Part 2
The accounting approach described in this article was originally designed by a CPA
working along with factoring company executives and a software development team
(including myself) and has served well for the past 16 years. BY Dave Wexler
If your factoring software does not
include an integrated general ledger,
you are probably exporting to an
external general ledger. Depending on
the capabilities of your system, you may
be able to benefit by structuring your
accounting methods along the following
guidelines.
The 70% advance is charged to the Cash
Advances account and reduces our Cash
in Bank balance by the same amount.
At this point, our overall account
balances are:
Debit
Credit
685
The approach described in this article
was originally designed by a CPA
working along with factoring company
executives and a software development
team (including myself ) and has served
well for the past 17 years.
The difference between the amount of
the invoice and the advance becomes
the Funds Reserved and the initial Net
Rebate Due is established.
Cash in Bank
Accounts Receivable 1000
Net Rebate Due
Invoices Purchased
Cash Advances
700
Funds Reserved
300
Management Fees
Wire Transfer Fees
The concept behind double entry
accounting (the standard method of
accounting used today) is every transaction results in balancing debit and
credit entries into the general ledger.
Part 1 of this article (Commercial Factor
Fall 2009) described the accounting
performed when funding a $1,000
invoice at 70% with a 1% service charge.
Regardless of whether you disburse
funds by bank wire transfer or by
printed check, the resulting account
balances are the same (except for the
wire transfer fee).
To summarize from Part 1, the purchase
of the invoice gives us a debit to the
Accounts Receivable account and a
credit to Invoices Purchased.
Debit
Credit
Accounts Receivable 1000
Invoices Purchased
1000
Debit
Credit
Cash in Bank
Cash Advances
700
700
Debit
Credit
Net Rebate Due
Funds Reserved
300
300
The 1% service charge credits the
Management Fees account and reduces
the Net Rebate Due by the same
amount.
Debit
Credit
Net Rebate Due
10
Management Fees
10
If a wire transfer fee had been deducted
from the advance, there would also be a
credit to the Wire Transfer Fees account
and a debit to the Cash in Bank account.
Debit
Credit
Cash in Bank 15
Wire transfer fees
15
290
1000
10
15
When payment is received, there are
a number of things to account for. To
begin with, the money is deposited into
the Cash in Bank account as a debit, and
the Accounts Receivable balance for the
invoice is cleared to zero with a credit.
Debit
Credit
Cash in Bank 1000
Accounts Receivable
1000
In order to disburse the net payout
due to the client, the Accounts Payable
account is credited with $300 (which is
the original invoice amount of $1,000
minus the advance of $700). The offsetting entry is made to Net Rebate Due.
Debit
Credit
Accounts Payable
Net Rebate Due
300
300
The Commercial Factor | Winter 2010 27
The 1% service charge of $10 is debited
to Accounts Payable, resulting in the
correct net payout due to the client, and
credits the Management Fees account.
The net payout due is applied to
the invoice as a credit to Accounts
Receivable and a debit to Net Rebate
Due.
Debit
Accounts Payable
10
Management Fees
Credit
10
Likewise, the receipt of payment
against service charges due is applied
to the invoice as a debit to the
Management Fees account and a credit
to Accounts Receivable.
Accounts Receivable
Management Fees
Debit
Credit
10
10
From this point, there are two more
distributions in order to complete the
transaction and close out the invoice.
Although they could be ‘netted’
together, I’ll describe them in detail as
offsetting double sided entries.
Accounts Receivable
Net Rebate Due
Debit
Credit
290
290
The original reserve amount (which is
the original invoice amount of $1,000
minus the advance of $700) is applied
to the invoice with a debit to Accounts
Receivable and a credit to Net Rebate
Due.
Debit
Credit
Accounts Receivable 300
Net Rebate Due
300
If the net payout due is by check,
the Cash in Bank account balance is
reduced with a credit, and the Accounts
Payable balance clears to zero with the
offsetting debit.
Debit
Credit
Cash in Bank
Accounts Payable
290
290
If the net payout due were disbursed
by bank wire, the Accounts Payable
account would be ‘bypassed’ resulting
in the same ending balances.
Our final account balances:
Debit
Credit
Cash in Bank
Accounts Receivable
Net Rebate Due
Invoices Purchased
Cash Advances
700
Funds Reserved
300
Management Fees
Wire Transfer Fees
25
1000
10
15
Activity history for the invoice:
Debit
Advance
700
Net rebate due
300
Wire transfer charge
15
Wire transfer credit
Service charge
10
Net rebate reduction
Payment received
Service charge pmt rec’d
Reserve balance
300
Payment due
Credit
15
10
1,000
10
290
Dave Wexler
is president
of Capital
Software, the
developer of
FactoringPlus software
designed for
factoring
companies. Dave has been
developing software applications and
supporting business systems for 25
years. Dave can be reached at dave@
cap-soft.com or
614-336-2865.
28 The Commercial Factor | Winter 2010
legal factor
BY John A. Beckstead, Esq.
Recovery of Cash
Converted by Client
No matter how many instructions,
notices, penalties, and threats are
given to a client, the client inevitably
accepts (or steals) payments from the
account debtor that were to have been
paid directly to the factor. During an
ongoing, healthy relationship, this
usually isn’t a major issue because the
converted payment is simply deducted
from the next advance. Unfortunately,
it often happens just before the client
closes its doors or files bankruptcy. Can
anything be done to recover the cash
in these scenarios? Yes, but you must
move quickly.
Because a sale of accounts is subject to
Article 9 of the Uniform Commercial
Code, the analysis for conversion of
cash is the same whether the factor
made a true purchase or has a security
interest. A security interest in collateral
continues in identifiable proceeds of
the collateral. This includes the cash
collected on an account receivable
which has been purchased by a factor
or in which the factor has a security
interest. For cash proceeds, the UCC
requires that the proceeds be identifiable. To be identifiable, the factor must
be able to trace the cash and show where
the actual converted dollars went.
Tracing and identifying cash proceeds
can become complicated. The client
typically deposits the converted
cash into its bank account, where
it is commingled with other funds.
The balance may fluctuate above and
below the amount of converted cash
that was deposited. For example, the
client converts $20,000 in payments
on accounts receivable. The factor is
entitled to the $20,000 because it is
proceeds of the accounts. However, the
moment that the $20,000 is deposited
into the client’s bank account and
commingled with other funds, issues of
tracing the $20,000 are created. If the
client already had a balance of $10,000
in the bank account, there is now a
balance of $30,000. In the next few days,
the client deposits more money and
writes checks on the account so that
the balance in the account goes up to
$35,000 and then down to $15,000. How
can the factor show that the remaining
$15,000 is part of the $20,000 in
converted funds?
Section 9-315(b)(2) of the Uniform
Commercial Code provides that if
proceeds are comingled with other
funds of the debtor, the secured creditor
has the burden of identifying the
proceeds by a method of tracing. The
UCC does not provide what methods of
tracing are acceptable and merely gives
the guidance that such methods include
the application of equitable principles
and methods permitted under law
other than the UCC. The Official
Comments to this UCC section specifically identify the “lowest intermediate
balance rule” (“LIBR”) as a permitted
method of tracing. LIBR is the method
most widely used by courts but other
methods, such as the accounting
method of first in, first out and tax
tracing, have been used occasionally.
The lowest intermediate balance rule
presumes that the proceeds of collateral remain in the comingled account
so long as the balance of the account
does not fall below the amount of the
proceeds. The rationale for this theory
is that it is presumed the client would
spend its own funds before spending
the proceeds that are subject to the
security interest. In the above example,
so long as there was no point where
the balance in the debtor’s account fell
below $20,000, a court applying LIBR
would determine that the proceeds
of the collateral are traceable and
remained in the account. However,
when the balance fell to $15,000, a
court applying LIBR would determine
that the identifiable proceeds dropped
to $15,000. The factor would then be
limited to recovery of the $15,000.
Under LIBR, if the balance ever fell
to zero, there would no longer be any
traceable proceeds.
Timing is critical in recovering cash
proceeds. They are quickly dissipated.
Protections under LIBR decline as the
account balance declines. Once spent,
the factor cannot usually reclaim the
proceeds. For example, if the cash
proceeds are used for payroll or to
pay utilities, the factor does not have
a claim against the employees or the
utility company. An exception is made
if the recipient knew or should have
known the funds were proceeds of
factored accounts or of collateral and
were being spent without authorization of the factor. The factor will need
to quickly file a lawsuit and seek an
emergency temporary restraining
order to freeze the converted funds. If
bankruptcy has been filed, the lawsuit
is filed in the bankruptcy court. Cash
proceeds can disappear in a matter of
days or even hours.
All is not lost when a failing client
converts payments from account
debtors. But the window of opportunity
for the factor is fleeting and action must
be taken quickly. •
Information provided in this article is
general information only and not legal
advice. Readers are encouraged to
consult an attorney for specific
legal advice.
John A.
Beckstead,
Esq. is a
partner in the
Salt Lake City
office of the
regional law firm Holland & Hart LLP.
He can be reached at jabeckstead@
hollandhart.com or 801-799-5823.
The Commercial Factor | Winter 2010 29
The IRS Collection Process:
From Filing to Subordination
It is important for Factors to understand the IRS’s collection process and what can
be done to protect the Factors’ interests.
By Jason Peckham, Esq.
Last year was tough on many businesses. The IRS’s 2009 statistics, which
were released in January, bear this out.
In 2009, the IRS collected $48.9 billion,
which represents a 13 percent decrease
in collections from 2008 when the IRS
collected $56.4 billion. Although the
amount collected in 2009 decreased,
the level of enforced collection actually
increased. The number of liens issued
by the IRS increased approximately 25
percent from 768,168 in 2008 to 965,618
in 2009. Likewise, the number of levies
issued by the IRS increased approximately 32 percent from 2,631,038 in
2008 to 4,478,181 in 2009.
As the effects of the economic downturn were felt by everyone, it appears
the number of businesses and individuals that “borrowed” from the IRS
increased. However, the ability to repay
those liabilities decreased, despite the
increase in enforced collection. It is
likely that the number of taxpayers
owing money to the IRS and the
number of liens filed in response will
remain high and may even continue to
increase through 2010. Since Factors
are more likely to encounter these
issues in the near-future, it is important
to understand the IRS’s collection
process and what can be done to protect
the Factor’s interests.
Statutory Lien
Before a lien appears, there must be a
liability. A federal tax lien may arise in
conjunction with any kind of federal
tax, e.g., withholding, unemployment,
or income (business or personal).
Generally, the taxpayer must compute
the tax due on the return and make the
necessary payment on or before the due
date for filing the return. If the taxpayer
fails to pay the tax when due, the IRS
will “assess” or formally record the tax
in the official books and records of the
U.S. Department of the Treasury (Code
Sec. 6201).
30 The Commercial Factor | Winter 2010
After the assessment, the IRS will
issue a notice and demand for payment
within ten days from the date of the
notice. If the taxpayer fails to pay the
tax within the ten-day period, the tax
lien arises statutorily by operation of
law and is effective retroactively as of
the date of the assessment (Code Sec.
6321). At this point, there is a statutory
lien, which is effective between the IRS
and the taxpayer. The statutory lien has
no effect on third parties.
CP 504
If the liability is not paid after
the initial notice and demand for
payment, the case will be transferred
to the Collection Division of the IRS
(Collections). Initially, Collections will
issue letter CP504 – Notice of Intent
to Levy. The CP504 is a warning letter
– pay the liability or the IRS will begin
taking enforced collection at some
point.
Assignment of a Revenue
Officer
There are two separate groups within
Collections – the Automated Collection
System (ACS) and Revenue Officers
(RO). Generally, individual liabilities
are addressed (at least initially) by
ACS. Business liabilities are generally
addressed by ROs. Whereas Factors’
clients are businesses, most of these
taxpayers’ cases will be assigned to
ROs. Shortly after being assigned to
the case, the RO will generally issue a
Notice of Federal Tax Lien (NFTL)
and/or a Final Notice of Intent to Levy
(Final Notice), assuming these have not
already been issued by ACS.
Notice of Federal Tax Lien
For the IRS’s lien to be effective against
third parties, creditors must be publicly
notified that the IRS has a claim against
all the taxpayer’s property, including
property acquired after the lien is
filed. The NFTL is used by courts to
establish priority in certain situations.
Depending on the state of residence
of the taxpayer and the location of the
property, the federal tax lien attaches
to all the taxpayer’s property (e.g.,
equipment) and to all rights to property (e.g., accounts receivable). The
federal tax lien attaches to all property
belonging to the taxpayer on the date of
the assessment. The lien also attaches
to after-acquired property – to any
property owned by the taxpayer during
the life of the lien, e.g., accounts receivable (Glass City Bank v. US, 326 U.S. 265
(1945)).
The federal tax lien remains in effect
until the liability is paid in full or it
becomes unenforceable. The full
amount of the lien remains a matter
of public record until it is paid in full,
including all additions and / or accruals
of penalties and interest. For taxes
assessed on or after November 6, 1990,
the statute of limitations whereby the
lien generally becomes unenforceable
by reason of lapse of time is ten years
after the date of assessment (Code
Sec. 6502(a)). Various exceptions may
extend the time periods for collection
of the debt.
Effect of NFTL on Priority
Generally, the basic priority rule of
federal common law is “first in time,
first in right,” assuming the competing
interest is choate at the time the federal
tax lien arises. An interest is “choate”
when (1) the identity of the lienor, (2)
the property subject to the lien, and (3)
the amount of the lien are established.
Code section 6323(c) governs priority
between a filed federal tax lien and a
security interest in property acquired
by the debtor-taxpayer after the NFTL
has been filed. The agreement could be
either to lend money (with commercial
financing security as collateral) or to
purchase the commercial financing
security. To be protected, the lenders or
purchasers must have entered into an
agreement before the NFTL is filed.
Once the lender and taxpayer enter into
the agreement, it would be unreasonable to expect the lender to have to
check lien recordation on a daily basis
to make sure that no NFTL is filed
before funds can be advanced. Code
Sec. 6323(c) has granted these creditors
priority over the federal tax lien to the
extent that the loan or purchase is made
within 45 days of the filing of the NFTL
or made before the lender or purchaser
had actual knowledge of the filing, if
earlier. This is known as the “45-day
rule.” If receivables are purchased or
used as collateral 46 days after the date
of the NTFL, the Factor is in second
position behind the IRS.
Final Notice of Intent to Levy
There is a considerable amount of
confusion regarding the difference
between a lien and a levy. A lien is
a charge or an encumbrance that a
person has on the property of another
as security for a debt or obligation. The
most common is a home mortgage.
place and the Final Notice must have
been issued).
Subordination and/or
Forbearance
Once the IRS issues the NFTL,
especially in conjunction with a Final
Notice, it is imperative that taxpayers
pursue an Installment Agreement
and Factors pursue a subordination
of federal tax lien (subordination).
Per section 5.12.3.11 of the Internal
Revenue Manual, a subordination
“elevates another creditor’s lien to the
Service’s priority position making the
Service’s lien junior to that creditor’s
lien.” Essentially, the junior lien holder
and the IRS trade positions. By subordinating the lien, the IRS allows a Factor
to take a priority interest ahead of any
IRS claims on value of the property.
There is no specific IRS form for a
subordination or discharge of a federal
tax lien. Regardless, the process is very
specific. Per Publication 784, How to
Prepare Application for Certificate of
Subordination of Federal Tax Lien,
the taxpayer is to provide the IRS
with the following information: (1) a
detailed description of the property,
(2) a copy of the tax lien, (3) a description of the encumbrance to which the
IRS will be subordinated, (4) a list of
encumbrances with priority over the
IRS, (5) information on the value of the
property, (6) how much the IRS will
receive currently, (7) how much the IRS
will receive in the future, and (8) other
relevant information.
This application for subordination, as
it pertains to Factors, was confused
considerably by the September 7, 2006
revisions to IRM section 5.12.3.13(6).
The confusing language indicated,
“issuance of a subordination certificate
that purports to allow for the sale of
future accounts receivable without
the need for a discharge should not be
approved.” Many Technical Services
Advisors interpreted (and still
interpret) the language to mean that
subordinations for Factors purchasing
future receivables cannot be granted.
Fortunately, in November 2008, the
A federal tax lien does not divest the
taxpayer of his or her property or rights
to transfer property. A levy does the
divesting. A levy transfers constructive ownership to the government.
Per Internal Revenue Manual Section
5.11.1.1.2(1), there is no legal distinction
between levy and seizure.
Before an RO can issue a levy, the IRS
must first issue a Final Notice and
provide the taxpayer with 30 days to
appeal the action through a Collection
Due Process hearing. If the 30 days
expire without a resolution or an appeal
by the taxpayer, the RO may proceed
with enforced collection and can begin
issuing levies on the taxpayer’s bank
accounts and / or accounts receivable.
The IRS will generally use a notice of
levy (Form 668-A or 668-W) to take a
taxpayer’s property held by someone
else if it can be turned over by writing
a check. Contrary to popular belief, the
IRS does not have to record a NFTL
before it can pursue enforced collection activity (however, there must be
an assessment and statutory lien in
The Commercial Factor | Winter 2010 31
Director of Collection Policy issued a
memo providing “Interim Guidance for
Subordination to Factors” modifying
the language in the IRM and clarifying
the IRS’s position. The new language
allows for subordinations of receivables existing on the issuance date
and for after-acquired receivables for
up to one year. The description of the
assets included in the subordination
must read, “all [or specific] accounts
receivable belonging to [taxpayer
name] in existence on mm/dd/yyy and
coming into existence prior to mm/dd/
yyyy.” Any extension would require a
new application.
To obtain the subordination, the
application should demonstrate
convincingly that subordination of the
IRS’s position will facilitate collection of the taxes due. Demonstration
that factoring is essential to the client
/ taxpayer remaining current and
compliant with the federal tax deposits
and making monthly payments to
the IRS is generally sufficient. This is
convenient since a formal Installment
Agreement (signed 433-D) “must be
secured in conjunction with the subordination.” Generally, issues that would
result in termination of an Installment
Agreement would also result in termination of the subordination agreement.
Alternatively, the Factor could request
a forbearance agreement. With such
an agreement, the Director of the IRS
“agrees not to assert the Service’s tax
lien priority under IRC section 6323(a)
or to levy pursuant to IRC section
6331 against the Taxpayer’s accounts
receivable, which accounts are used
as security for advances made by the
Factor to the Taxpayer prior to the
termination of this agreement.”
The normal processing time for a
subordination may be as long as 30 to
60 days. However, when there is danger
of losing the loan, the IRS may expedite the certificate at the taxpayer’s or
representative’s request.
It can take several months from the
filing of the returns to the assignment
of an RO. Once an RO is assigned, a
NTFL and / or Final Notice can be
filed within a few days. It may take the
IRS a while to catch on, but when they
do they can move quickly, which can
be quite disruptive to the Factor. The
earlier the liability with the IRS can be
identified and addressed, the easier it is
on the Factor and its relationship with
its client. •
Jason
Peckham,
Esq. is
a senior
consultant
with 20/20
Tax Resolution. For nine years, Mr.
Peckham has negotiated resolutions
with the federal and state taxing
authorities on behalf of his clients
from across the country. He can be
reached at 800-880-7318, ext. 125
or [email protected]
32 The Commercial Factor | Winter 2010
small ticket factor
BY Jeff Callender
Debtor Trends & the
Very Small Factor
This issue’s theme revisits the topic of debtor trends that was considered exactly a year
ago. What’s different now about debtor trends, if anything? This article will consider
the main points described in last year’s article and see what’s changed, what is still the
same, and consider any new developing trends. Text in italics are quotes from last year’s
article, and normal font text following it is the update.
Account debtors – and the population
in general – are cutting where they can
to save money. The thinking that has
abruptly been adopted by just about
everyone is this: the gravy train is over
and now we’re in Cut Back and Save
Mode.
In my small factoring business, and
certainly in everything you read in the
newspapers and hear on the news, this
continues and in fact has accelerated.
Scrimp and save is the new normal.
State budgets are being slashed to
avoid multi-billion dollar deficits and
everybody is tightening their belts. The
thinking of many very small businesses
now is not usually “How do I grow?” but
“How do I survive?”
In general many small business owners
are just hunkering down and strategizing how to get by. For example, I’ve
noticed this: when new prospects who
have only one or two account debtors
they want to factor are told we’d like to
see a greater number of customers, they
usually respond with a brief silence and
then, “New business is hard to come by
right now.”
Smaller and fewer invoices mean less
income for me from their account, and
I need to find more clients to make up
the slack. Fortunately, the good part of
this economy is the presence of other
prospects needing factoring.
Still true, and in fact over the past
year more potential clients have been
knocking on my door than in the past.
Factoring is becoming better known
among small businesses and with banks
keeping lending to small businesses
very tight-fisted, more and more small
business owners are turning to factors.
These prospective clients are also
becoming more savvy about finding
factors on the internet; I’ve noticed a
definite increase in prospects who have
found me on their own. All indications
are that this trend will continue and
probably increase this year, especially
as long as the banks remain stingy with
very small businesses. So be ready for
more business; but realize there is also
more junk out there. So you need to
be on your game discerning the good
prospects from potential nightmares.
Some customers who used to routinely
pay in 30 days are now taking 45 days,
and those who paid in 60 are often
paying in 90 or more.
Absolutely continuing and getting
worse. Some previously 30 day payers
are not just paying in 45 or 60, they’re
paying in 80 or 90 days and even more.
I’ve had to drop a number of these
debtors from Accepted status because
they just make me nervous. Usually the
clients are on the same page as I am on
these accounts, but again, replacing
them with new business is not easy for
many.
Even government entities, previously
slam dunks for debtor approvals, need to
watched. Numerous states are running
In addition to running his factoring business
(DashPointFinancial.com) which buys receivables of
very small businesses, Jeff Callender has written
several books and ebooks on factoring which can be
obtained from DashPointPublishing.com as well as
the IFA website’s Store. He also is the developer of
FactorFox software (FactorFox.com), a web-based
program used by factors to track their receivables. You
can reach him at 877-620-3699 or via email at jeff@
DashPointFinancial.com or [email protected].
The Commercial Factor | Winter 2010 33
multi-billion dollar budget deficits and
most cities and counties are watching
their expenses very carefully, often
cutting many funded programs.
In the state of Washington, where I live,
the legislature is scrambling to make up
a $2.6 billion deficit and some previously sacred cows are close to entering
the slaughterhouse. Also new taxes are
being seriously considered, which a
few years ago would have had people
howling. Now there’s not much of a
peep in response. People realize that
government needs income to run, and
we’re getting to the point where only
cutting programs alone can’t make up
the shortfall.
As a result, we need to continue to think
twice and do more homework than we
used to regarding the stability of state
and local government debtors. And of
course, as always, we must watch our
concentrations…now with government
entities and their programs that may
get slashed.
We all know that banks have become
ultra-cautious in their lending,
compared to what they were just a year
ago.
Much more so now. Not only are they
lending less, they’re cutting or eliminating lines of credit for a lot of small
businesses whom they had served for
some time. These people, previously
not as likely to be small factoring
clients, are turning to factors because
there’s nowhere else to go. As long as
banks continue to think and behave like
this, we will have these companies as
clients. While they’ll probably return
to banks as soon as the banks’ thinking
changes and their fists open again, it
means more business for us both now
and in the future.
Factoring is becoming better known
and perhaps more accepted with less
of a grudge by those who previously
wouldn’t recommend it. This means
if we provide good service and decent
competitive rates, there will continue to
be plenty of business for small factors
both throughout the present economy
as well as when it turns around.
Despite the negative aspects of the
economic climate in which we now
operate, the outlook is promising for very
small factors in particular and factors
of any size – as long as debtors continue
to pay and as long as our own source of
working capital is secure.
Still true. And one other thing: with
bank CD and interest rates so low
for such a protracted time, private
individuals are looking for places to
invest personal funds that make more
than 1.5% for a couple years. They’re
more willing to risk at least a portion
of their investment funds in a factoring
company that pays significantly more
than that. This means that smaller
factors with a good track record and
sound risk management methods in
place may be able to find more working
capital from private individuals just
looking to make a good return.
One final trend I’ve noticed that wasn’t
mentioned in last year’s article is this.
Recently I’ve had a couple very longtime clients get sticky fingers -- they
began telling customers to pay them
instead of me, and converted checks for
factored invoices.
Until recently these individuals had
been model clients for years – they
were honest people, great to work with,
and we made good money together.
I don’t know what turned them into
thieves – personal financial problems,
IRS chasing them, not finding new
business due to the economy, maybe
other issues. But these incidents have
reminded me anew of a fundamental
factoring principle based on human
nature I’ve long believed: most clients
will act in their own perceived self-interest, and if they feel that self-interest
requires ripping off their factor, many
will do so, even if that factor has helped
them for years.
Therefore we smaller factors (and
larger ones as well) need to continue
with basic, sound factoring practices in
place for all clients, not just new ones.
We must never become complacent
or lax with our due diligence, follow
up calls, and everything we do to get
our money back. Especially in difficult
economic times, clients will do what
they think is necessary to survive, and
we need to rely on good old factoring
practices, discerning business judgment, and sound risk management
tools to survive and thrive ourselves. •
34 The Commercial Factor | Winter 2010