A Publication of The International Factoring Association
Summer 2010 • VOL 12/ No. 3
FRAUD
ALSO INSIDE:
Earning a PhD in Fraud • The Unknown Variable and Fraud
Fraud: Can You Prevent It? • Industry Focus: Government
www.healthcapitalinvestors.com
Summer 2010 • VOL 12 / No. 3
Earning a Phd in fraud
By Allen E. Frederic
Accounting for factoring transactions:
a client’s perspective
By Jonathan Freedberg
By Barry Minkow
The unknown variable and fraud
What’s New at IFA
Federal government factoring update
By Kwesi Rogers
By Neville Grusd
By Jeff Jacobs
Govt Regs May Suffocate ABL and Factoring
FRAUD: Can You Prevent it?
columns
legal factor unapplied collections and
unclaimed property laws
by John A. Beckstead, Esq.
an inside look Q&A with Mike Cagan
sales and marketing Sales responsibility in
fraud prevention
by Thomas G. Siska
small ticket factor Why some accountants
drive small factors crazy
by Jeff Callender
ADVERTISER INDEX
3i Infotech..................................................................................... 14
AFA.................................................................................................29
Bayside Business Solutions........................................................ 8
Bibby Financial............................................................................ 12
Boston Financial & Equity....................................................... 15
Capital Software.......................................................................... 15
Factor Fox..................................................................................... 31
First Corporate Solutions........................................ Back Cover
Greystone Commercial Services LP....................................... 10
Hartsko Financial.......................................................................20
Health Capital Investors............................Inside Front Cover
IFA......................................................................................16, 21, 24
RiskFactor Solutions...................................................................11
RMP Capital Corp......................................................................... 9
The Commercial Factor | Summer 2010 3
from the executive director
According to the IFA’s
Business Profile and
Performance Survey,
over 90% of Factors have
experienced a fraud.
My guess is the other 10% are companies that are either new to factoring or just
haven’t recognized the fraud yet – more unfortunate are those factoring companies not included in the survey because they are no longer around due to being a
victim of fraud. It is with that statistic in mind, we present our Fraud issue.
My perception is that the incidence of fraud against factors has increased over
the last year and will continue to increase. As times get tougher, business owners
turn to various means to keep their companies afloat and keep their lifestyles
intact. What begins as a simple pre-billing can turn into an elaborate fraud
scheme. We have all seen many “good” factors get over-confident, followed by
over-concentrated followed by over-exposed followed by over their heads and
under water.
As Factor’s detection techniques become more sophisticated, so do the fraud
schemes. Technology can both assist the factor and well as the fraudster. One of
the most memorable quotes from a factor is: “You can like your client, you can
even love your client, but you can never trust your client.”
In this issue, you will find a variety of articles discussing various aspects of fraud.
In addition, the IFA is conducting a training course on October 6-8 on Fraud
Detection and Monitoring Techniques. The speakers and outline for this course
will make this the most educational and enlightening course ever on Fraud.
Finally, there was a letter from a past director of CFA in the May/June issue of
the ABF Journal in which it was implied that non-traditional factors deserve
to be defrauded. I take offense with siding with fraudsters and criminals over
factors. This was clearly a fraudster who set out to defraud their factor as well
as multiple other entities. In hindsight the factor may realize they made some
procedural mistakes, but criticizing the business model of a non-traditional
factor is not appropriate.
Enjoy this issue, keep diligent and I look forward to seeing you at an upcoming
IFA event.
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
Paul Cottone
Allied Affiliated Funding
Phil Cohen
PRN Funding, LLC
Tony Neglia
Stonebridge Financial Services, LLC
Oscar Rombola
ITC Invoice to Cash
Tim Valdez
Transportation Alliance Bank
Debra Wilson
Vertex Financial, Ltd.
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].
4 The Commercial Factor | Summer 2010
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
Announcements
Jeff Bell Named President of
Transportation Alliance Bank
Transportation Alliance Bank (TAB), a
wholly owned subsidiary of Flying J Inc.,
has appointed as President, Jeff H. Bell,
J.D. Bell worked previously at Flying J
and TAB and is returning after serving as
the executive vice president of Stearns
Financial Services, a Division of Stearns
Bank N.A. since May of 2003. Transfac Hires Directors of Business
Development
Transfac Capital has hired Robert
McCarthy as regional director of Business
Development out of San Francisco..
Transfac Capital has also added Richard
Strezo as regional director of Business
Development in Chicago.
Riviera Finance Announces Hirings
Riviera Finance recently welcomed three
factoring veterans. Mark Keehnle joined
in Boston to represent the company in the
New England area. Just down the coast,
Riviera’s New Jersey office added Michael
O’Gara to its roster. And in Toronto, Mr.
Dhruv Lal has joined the Riviera team.
Graystone Capital Appoints SVP/
Business Development
Graystone Capital is pleased to announce
that Gary J. Panepinto has been appointed Senior Vice President Business
Development. Gary has been in the Asset
Based Lending and Factoring industry for
over fifteen years.
Mergers/Acquisitons
Funding Solutions Acquires Stearns
Financial Services A/R Finance
Division
Alliance Funding Solutions, a division of Transportation Alliance Bank
(TAB), located in Ogden, Utah, acquired
Stearns Financial Services, the Accounts
Receivable Finance Division of Stearns
Bank N.A. as of May 1, 2010. Alliance
Funding Solutions purchased all assets
of the division and has begun the initial
phase of transitioning operations. Industry Transactions
Graystone Capital Funds A/R Line
of Credit
Graystone Capital has recently funded a
$1,500,000.00 Accounts Receivable line of
credit for one of the nation’s leading publishing, research, event, and new media
companies.
Federal National Provides Facilities
Federal National closed the following:
• $750K working capital line for a consulting firm to the federal government.
• $200K a/r line to a system support
services provider
• $2 million a/r line
United Capital Announces Funding
Program
United Capital Funding Corp has set up
a special program to provide funding
immediately for businesses helping in the
recovery efforts along the Gulf coast, due
to the BP oil spill.
Coface Provides Factoring Facility
Coface Factoring provided a factoring
facility for a $3.5 million distributor of
household furniture and accessories. Wells Fargo Provides Financing to
Home Furnishings Importer
Wells Fargo Capital Finance provided a $2
million inventory purchase commitment
to a California-based home furnishings
importer. Transfac Capital Provides Financing
for Oil Spill Vendors
Wells Fargo Capital Finance
Provides Financing for Importer
Wells Fargo Capital Finance recently
provided factoring and purchase order
financing to a Connecticut-based active
wear accessories importer. Wells provided
letters of credit and transaction structuring that included a $7.5 million inventory
purchase commitment and financing of
the inventory at an advance rate of 100%
of the landed cost of the goods.
King Trade Funds Tactical Apparel
Provider to U.S. Troops
King Trade Capital’s (KTC) Government
Contract Financing program recently
funded a client that sells tactical apparel
and protective security goods, both directly to the various U.S. Armed Services and
to prime contractors. KTC has funded this
client $6 million in support of more than
$10 million in revenue for the company.
King Trade Capital Provides PO
Financing
King Trade Capital has provided $5.2
million purchase order financing to a fouryear-old home décor business located in
the Mountain West.
Transfac Capital has streamlined the
funding process for vendors of the BP
oil spill happening in the Gulf of Mexico.
Transfac has waived certain portions of
their process as well as set up fees in order
to accommodate businesses in need of
business finance to support the clean up
effort.
Sterling Factors Announces Deals
Greenfield Commercial Credit
Provides Financing
Factors Southwest to Offer Supply
Chain Financing
Greenfield Commercial Credit announces
the following facilities:
• $1.5 million a/r line of credit to a
specialty printer
• $4.1 million a/r line of credit to a
machinery manufacturer
Porter Capital Group Closes $5.45
Million in New Transactions
Porter Capital Corporation has recently
provided:
• $1 million line of credit to provider of
oil/gas field services in AL
• $1 million line of credit to cabinet
manufacturer in AL
• $1 million line of credit to industrial/
manufacturing systems and processes
solutions provider on TN
• $750,000 line of credit to a metal
fabrication company in LA
• $500,000 line of credit to a metal
fabrication company in MN
• $500,000 line of credit to an industrial staffing company in AZ
• $150,000 line of credit to low-voltage
wiring distributor/manufacturer in AL
Sterling Factors a subsidiary of Sterling
National Bank has extended a factoring
facility to a nationwide distributor of toys,
selling to department stores.
Sterling has also approved a factoring
facility to a $15 million dollar importer of
men’s suits.
Factors Southwest LLC will now offer supply chain financing to suppliers of credit
worthy companies. Prior to adding this
service, Factors Southwest solely provided
accounts receivable-based lending.
Celtic Capital Closes Five
Transactions
Celtic Capital Corporation announced
several new client relationships in May
totaling $8.1 million. The deals include:
• $1.25 million a/r line and term loan
to a company specializing in welding
and fabrication of titanium products
for the aerospace industry.
• $1.7 million a/r and inventory lines
of credit for a company that supplies
irrigation and sewer equipment for
residential and commercial use
• $750,000 a/r line of credit to a transportation services company.
• $2.5 million deal to a freight forwarding company.
• $2 million a/r line was established
for a company manufacturing stainless
steel tubing for industrial applications.
The Commercial Factor | Summer 2010 5
news
Ashford Finance Closes on PO
Financing Deal
Ashford Finance announced the closing
of a $2.5 million purchase order financing
facility for a California-based importer
specializing in kitchen supplies.
Liquid Capital Closes Three
Facilities
Liquid Capital has completed three factoring credit facilities totaling $700,000. The
deals include:
• $250,000 to a company that provides
brush mowing services.
• $250,000 to a company which provides trucking services.
• $200,000 to a company that provides
security and investigation services.
Skada Capital Secures Loans
Skada Capital announced that it has
secured loans for:
• Exela Pharma Sciences, a five-yearold Virginia-based pharmaceutical
company, with a $1 million hard
money loan secured by its sterile
manufacturing facility located in
North Carolina.
• Puente, LLC, a new, Maryland-based
construction contractor, received accounts receivable financing based on
a recently secured contract from the
Pentagon.
Summit Financial Closes
Credit Lines
Summit Financial Resources has recently
provided working capital facilities to the
following companies:
• $1.75 million A/R credit line to a
legal staffing company
• $650,000 A/R credit line to a transportation company
• $1 million A/R and inventory credit
line to a manufacturer of industrial
vacuum trailers
• $375,000 A/R credit line to a machinery parts manufacturer
• $750,000 A/R and inventory credit
line to a lumber wholesaler
• $2 million A/R credit line to an
entertainment marketing firm
Fraud News
Third Defendant Sentenced In
Scheme
Rodney A. Mathis has been sentenced to
27 months in prison followed by three
years of supervised release for wire fraud
in connection with a scheme to defraud
Federal National Payables of more than
$1 million. Judge Titus also entered
an order that Mathis pay restitution of
$1,109,835.68.
6 The Commercial Factor | Summer 2010
Contractor Sentenced To 46 Months
In Prison
Around that same time, First Capital
entered into a joint venture with Siemens
Financial Services to further develop its
working capital and accounts receivable
financing businesses in Asia. Today, the
lender maintains offices in New York,
California, Florida, Georgia, Oklahoma
and the Philippines.
Notable Industry News
Bibby Financial Services Reports
Growth in New Business
Gary Sean Clayton of Frisco, Texas was
sentenced to 46 months in prison for conspiracy to commit wire fraud. He was also
ordered to pay restitution of $472,073.19
to Holy Cross Hospital, and $180,175 to an
unnamed factoring company.
RiskFactor Solutions Expands Reach
Into USA
Jeff Jacobs, formerly of First Capital
Corporation and an industry veteran of
30 years has formed a strategic alliance
with RiskFactor Solutions from the UK, to
market their risk management products to
US based factors and asset based lenders.
Developed as a result of over 25 years
industry experience focusing solely on
risk, RiskFactor is a proven, complete &
flexible risk management system, offering
a comprehensive suite of products that
accommodate all types of commercial
finance lending.
First Corporate Solutions Launches
Webinar Series
First Corporate Solutions, a global public
records search, retrieval, filing and monitoring firm is launching a free UCC and
corporate due diligence webinar series.
The monthly online sessions are designed
to offer convenient training to lenders,
factors, legal professionals and entrepreneurs and to supply a forum for knowledge
sharing amongst these industries.
The premier event on June 23, 2010 was
titled “An Insider’s Guide to Avoiding UCC
Filing Mistakes” and provided an overview
of common mistakes that occur on UCC1
Financing Statements and UCC3 Change
Statements and offers practical suggestions for how to avoid them.
Carole-Ann Miller Named One of
Top CEOs in Atlantic Canada
The staff of Halifax-based Maple Trade
Finance are pleased to congratulate their
President, Carole-Ann Miller, on being
named as one of Atlantic Canada’s Top 50
CEO’s of 2010, the fourth consecutive year
for which she has been recognized.
HIG Backs First Capital
HIG Capital backed commercial finance
company, First Capital, pouring $139
million into the small- and mid-market
lender. The investment, which came
alongside co-investments from Morgan
Stanley Alternative Investment Partners
and funds advised by JPMorgan Asset
Management, gives HIG a majority stake
in the company’s common stock.
Bibby Financial Services reports a positive end to what its global chief executive
David Robertson describes as “some of the
most harrowing trading conditions of the
last half century.”
BFS North America contributed to the
group’s 24% new business growth in 2009.
The company ended the year with 4,738
clients, up 16% from 2008, and reported a
2009 Group profit of $29.7 million. BFS is
now supporting a historically high number
of small- and medium-sized companies
across a variety of industry sectors.
International News
Banking & Finance Lienvietbank
Okayed To Provide Factoring
Service
The State Bank of Vietnam, the country’s central bank, has approved Lien
Viet Commercial Joint Stock Bank
(LienVietBank) to provide factoring
service.
Russia: Non-recourse factoring
expected to grow
Experts think non-recourse factoring
will become increasingly popular by
early 2011. In 2010, factoring market will
rise by 25-35%. According to Expert RA,
non-recourse factoring segment will rise
to RUB 100bn (EUR 2.63bn USD 3.21bn),
up from RUB 50bn as of 2009. Recourse
factoring is expected to increase to RUB
390bn up from RUB 311bn.
GE Capital Buys RBS’ French
Factoring Biz
GE Capital is bolsterings its European
vendor financing capabilities, acquiring the Royal Bank of Scotland’s French
factoring business, RBS Factor SA, for
an undisclosed sum. The deal follows GE
Capital’s purchase of RBS’ German factoring business earlier this year.
Credit Agricole Leasing and
Eurofactor Merger Completes
Crédit Agricole confirmed the merger of
Crédit Agricole Leasing and Eurofactor,
also a subsidiary, to form Crédit Agricole
Leasing & Factoring. •
fraud detection
Earning a PhD in Fraud
Obviously, there is no specialty school that gives a PhD in fraud detection/
prevention with a money back guarantee.Continued diligence is the only
prescription. We must all embrace and implement the motto “TRUST BUT VERIFY.”
BY Allen E. Frederic
Several years ago an industry colleague commented that he had obtained a PhD in fraud
detection / prevention. I asked where he obtained it thinking there was a specialty school
dealing with fraud. He replied “I earned it the hard way”. He then told me that he just had
written off six figures in a new client relationship involving phony invoices. I remember
chuckling and wondering how he could have been so dumb!
Subsequently, in years that followed I heard other industry colleagues tell the same
stories. Often they involved professional fraudsters who defrauded on the first funding as
well as longtime customers that submitted fraudulent invoices.
Visiting years later with my PhD friend, he again commented that one day I would pay my
tuition. Well, regrettably I have finally ‘earned’ that PhD! And, if it gives him any satisfaction, guess who was dumb!
Types of Fraudsters
The first type I would designate as the professional fraudster. This individual is so smart
that had his talents been applied honestly he could probably have been a successful
Fortune 500 CEO. He sets up an elaborate scheme to defraud the factor from the get go.
This may involve a boiler room operation whereby even if a factor calls to verify invoices,
The Commercial Factor | Summer 2010 7
fraud
the fraudster has established an elaborate phone switching apparatus with
multiple phone numbers for debtors in
various area codes that are all directed
to one boiler room and answered by
fraudsters who don’t actually work for
those debtor companies.
A second is one whom I would call the
character flaw fraudster. This individual starts out selling the factor valid
invoices. Nonetheless, It is just a matter
of time before things get tough or the
factor doesn’t advance when the fraudster wants an advance. At this point the
character flaw individual will attempt a
factoring fraud.
With some due diligence the factor
can often discern a character flaw
fraudster. His flaws usually turn up in
negative ‘clusters’, i.e., a combination
of some or all of the following: low
personal credit score, charge offs, track
record of items placed for collection,
lawsuits, judgments, written off bank
loans and cancelled credit cards,
etc. There is usually a pattern that
emerges regarding his capacity and/
or willingness to perform according to
agreements and contracts.
The third type is the “below radar”
character flaw fraudster. This person
may appear to be a very straight arrow
and/or could also be a longtime client.
For example, I had client for seven
years whom I had known since college,
a fraternity brother. He was an exemplary husband and father and went to
church every Sunday. However, when
this individual was pushed against the
wall and faced the possibility of not
making payroll and shutting down his
company the “below radar” character
flaw showed up. He submitted phony
invoices.
The fourth type is the vice fraudster.
He defrauds to feed his habits involving
drugs, gambling and sex – often all
three!
The last type is the rationalizer
fraudster. He thinks he is doing nothing
wrong. After all, if the factor is only
financing 80% of the value of the
invoice, not the 100% which he really
needs, he acts to defraud. Hence, if
he phonies up 20% of the invoices he
rationalizes that he is merely getting
the advance rate that he really deserves.
Additionally, he believes that he will
make up the slack with new billings
later on. He doesn’t phony up invoices
but gives you ‘pre-bills’, another clear
instance of fraud.
Where there are probably other types of
fraudsters, these are the five that I have
seen most often in one form or another.
I’ve only run into the professional
fraudster on a few occasions during
my career and was fortunate enough
to have detected this fraud on the front
end. In my experience the most difficult
to detect is the individual with the
“below radar’ character flaw and the
rationalizer. More often than not, this
can be a longtime customer who has
performed consistently and admirably
over a long period. Moreover, it can be a
client with low dilution, good collection
histories and has vendor relationships
that span numerous years. You may ask
what turns this client into a fraudster.
Many things can happen such as
8 The Commercial Factor | Summer 2010
fraud
reversals in his business, family business related issues, losses, falling sales,
disputes, lost contracts, etc. And, of
course, those familiar old ‘hooks’: drugs,
gambling, sex. I call these closet vices
as they most often are not apparent
during the due diligence process and
undetected until it is too late.
Types of Fraud
Among the numerous types of fraud I
have seen, I list the following:
trouble but you don’t know it yet. This
is especially prevalent with long time
clients who get in trouble and a degree
of trust has been built up such that the
client knows that the factor performs
limited verification. Another type I have
seen is collusion with an employee of
the debtor. A few of my colleagues have
gotten caught by this scenario resulting
in lawsuits against the debtor with
protracted legal action and expense.
The boiler room is where the factor is
caught on the front end trying to verify
invoices for a new client calling phone
numbers supposedly of the debtor
supplied by the client. In addition to the
above I have seen other fraud schemes
as well. One involved an out of state
based company which acquired a local
company. The purchasing company’s
attorney (who, as it turned out, was
the ‘fraudster’), closed the transaction
• Misapplied funds
• Pre-bill
• Inflated bill
• Re-bill
• Totally fraudulent billing where contacts and purchase orders
don’t exist
• Collusion with employee of debtor,
also involving fraudulent billing
• Boiler room operation
• Other elaborate fraud scheme
There is not a factor in the business
that hasn’t been hit with misapplied
funds. If we do a good job of notification we should be covered under the
UCC Article 9 protection. I don’t know
a factor that hasn’t been hit with prebills which is more prevalent in some
industries than others - for example,
printing with bill and hold issues.
Inflated bills typically occur in the
service industry whereby the contracts
are long and include complex billing
procedures for numerous activities
occurring simultaneously. In this case a
factoring client may inflate the bill with
an activity not allowed. For example,
I once had a drilling rig operator that
leased his rig for X dollars a day. On one
bill he submitted not just the day rate
but a mobilization charge. This wasn’t
allowed in the contract. He knew it
wasn’t allowed but needed some extra
money and of course blamed it on a
billing mistake that someone else in the
company made. Re-bills are another
common issue where an old invoice
reappears with a new date and a new
contract number.
While all of the above are fraudulent
activities they are perhaps more
common than the next group. The first
is the totally fraudulent bill. Typically
you won’t find a client giving you only
one totally fraudulent invoice. This is
usually done when a client is in serious
The Commercial Factor | Summer 2010 9
fraud
and immediately thereafter met with
all of the factors in the area to obtain a
factoring facility. Prior to the purchase
of the local company its receivables
were free and clear. The purchaser
paid 20% cash for the company with
the remainder payable in installments
over 24 months. The scheme was to
immediately factor all of the receivables
which would yield approximately four
times as much cash as the 20% down
payment that had been fronted. After
the initial factoring funding the ‘buyer’
would disappear. While the original
owner would get his company back all
of his receivables would have been sold.
Lesson -- Know your client…
How to Detect Fraud
Notification
The first step is to make sure you have
done notification and done it correctly.
This should protect you against any
misapplied funds receiving the protection of the UCC Article 9.
Verification of Invoice
The most important element is
verification of the invoice. This can
be done in writing and in some states
verbally recorded, and saved to a digital
file. Check your state laws. When not
recorded, it may become a court case of
he said she said even with written notes.
Accordingly, I favor written verification
and recorded verification. The problem
with verification is that by human
nature we tend to lessen verification for
long time clients when things appear
to be going well. As such, I favor spot
verification with a verification target,
i.e. the percentage of invoices verified
changes weekly depending on changes
in purchase and collection patterns, a
change in the aging, change in invoice
size, change in debtors, etc.
Verification of Debtor Phone
Numbers
This should be a standard practice and
we should not simply trust our client to
give us the correct phone number of the
debtor but this needs to be confirmed
via the internet, yellow pages, etc.
Verify Debtor Contact
It is also essential to verify the debtor
contact and make sure that the contact
actually works for the debtor and is
not a third party. In addition, actual
or implied authority of this contact to
verify for the debtor must be double
checked.
For some larger factoring transactions
company checking accounts should be
reviewed to make sure that cash items
are not being deducted and going into
another company or to the owner to
feed a vice. Detection of such items is
usually a good indication of fraud since
not many companies that factor can
afford to feed a vice.
Audits
Collateral field exams or audits are
used by asset based lenders but also
by factors on larger transactions, both
initially before the first funding as well
as for ongoing exams.
Check of Tax Liens and Public
Records
Checking of tax liens on a periodic
basis, for example - monthly, not only
protects the factor against tax liens but
also should be an indication of financial
stress in the company which could give
rise to fraudulent activity. Other public
record searches for judgments, liens,
etc are also good indicators.
Summary
Obviously, there is no specialty school
that gives a PhD in fraud detection /
prevention with a money back guarantee. Remember that the price of
tuition is very painful and steep. Many
factors have paid it with losses in red
ink. Continued diligence is the only
prescription. We must all embrace and
implement the motto “TRUST BUT
VERIFY”. •
Allen E.
Frederic is the
President and
CEO of Gulf
Coast Business
Credit, New
Orleans, one of the 25 largest
factoring companies in the United
States. Frederic’s career in banking
spans 35 years. He is a frequent
lecturer for professional associations
and universities. He can reached
at 504-412-2027 or allenfrederic@
gulfbank.com.
10 The Commercial Factor | Summer 2010
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Accounting for Factoring
Transactions: A Client’s
Perspective
This article demonstrates that it is sometimes the simplest of tools that make the
running of a complicated machine that much easier. Keep YOUR balance!
BY Jonathan Freedberg
There is the story of the august and
venerable Managing Partner at a firm
of Public Accountants who, every day
on arriving at work would be seen to
extract a key hanging at the end of a gold
chain attached to his vest and resting in
his pocket. Carefully, he would insert
the key into the top drawer of his desk,
open it and peer into it for a moment or
two and then, with a flourish, close and
lock the drawer before re-inserting the
key into the pocket of his vest covering
his ample and rotund middle. It was an
act that aroused much speculation and
wonder, never resolved until that fateful
day when the gentleman (he was a
gentleman), passed away and journeyed
to those Happy Hunting Grounds in the
sky where all good accountants finally
find balance.
With the same flourish, the new
Managing Partner, surrounded by his
many acolytes, slowly and with much
ceremony, opened the self-same drawer
into which all now peered….to find a
single piece of paper, glued to the bottom
of the drawer, a thick black line dividing
the page vertically. On the left and right
sides of the page was written: “Debits on
the left, credits on the right”. (You have
to know some accounting to appreciate
this, I guess!)
While we all look at things differently,
it is important to provide our clients
with the right perspective on things,
if we can. How our clients record the
transactions that take place between us,
as Factors, and their respective account
debtors is sometimes as much of a
mystery to us as it is to them. (How often
do we reconcile the client’s record of
the transactions in their general ledger
with ours? Indeed, sometimes we do not
even receive Financial Statements from
our clients other than at year end.) Not
all of them have informed CPA’s to help
them sort out these arcane matters. In
addition, it is important to ensure that
the accounting for these transactions
reflects a sale or assignment of assets as
opposed to the receipt of a loan against
the value of the asset (receivables).
Let us work through the various stages of
the transaction.
n Client generates an invoice for the sale
of goods or services to its customer (the
account debtor).The double entry for
this transaction, recording the revenue
due to the Client, in its general ledger is
the following:
•Dr. Customer XYZ: $1,000.00
•Cr. Sales: $1,000.00
n Client sells the invoice to the Factor:
•Dr. Due from
Factoring company
$1,000.00
•Cr. Customer XYZ
$1,000.00
The Client hereby shows a change in
the identity of the debtor. This reflects
the fact that Customer XYZ no longer
owes the Client money, but now owes
$1,000.00 to the Factoring company. This
is the basis of the Assignment of the debt
by Client to Factor and the reason why
payment to the Client does not settle the
liability for the debt by Customer XYZ,
as all good Notification of Assignment
letters should clearly state.
n Client receives an advance (say 80%)
from Factor:
•Dr. Cash in Bank
$800.00
•Cr. Due from
Factoring company
$800.00
n If there is any charge, such as a Wire
Fee due to the Factor for this advance, it
is recorded as follows:
•Dr. Factoring Charges
(Expense)
$25.00
•Cr. Due from Factoring
company
$25.00
At this juncture, the general ledger of
the client will show Sales Revenue of
$1000, an expense of $25, an asset due
to it by the Factoring company of $175
and cash in the bank of $800. Of course,
this is a much simplified view of the basic
transaction.
The Commercial Factor | Summer 2010 13
A Cash Basis or Accrual Basis method
of accounting will influence the method
by which the fee paid to the factor is
recorded. While most accountants
will hold that an Accrual basis is the
only really appropriate method of
accounting, since it describes the
time value of money, many businesses
for the sake of simplicity or for tax
reasons might choose to record their
transactions on the Cash Basis.
In this circumstance, the difference
is quite stark: If the cash basis is used,
no further entry for Factoring fees
will be recorded. The invoice is still
outstanding and the final factoring fee,
based on the effluxion of time has not
been paid to the factor. This reasoning,
although flawed (of course, a fee is due
to the factor at this point, it just has not
been finalized and the final result is
indeterminate) results in an overstated
picture of the true profitability of the
client. The only expense shown will be
the $25 above.
The real expense, based on the rate
structure payable by the client,
would be easily calculated as of the
end of the month, the usual regular
accounting period. In an accrual basis
of accounting, the fee would be calculated (usually by reference to reports
produced by the Factoring company)
and would be entered via a Journal
entry like the one recording the $25
wire fee above. So, the accumulated fee
at this point would not be the final fee
and an additional entry would need to
be recorded when the invoice is paid
and the final fee established. In the cash
basis, the fee would only be recorded,
and in full, when the invoice is paid.
One of the selling points I introduce to
a prospective client is that Factoring
represents an “off-balance sheet”
form of financing as opposed to the
recording of a loan granted against the
value of an asset. This off-balance sheet
financing improves the strength of a
client’s balance sheet by showing the
receipt of cash from the Factor as an
asset, the balance of the Reserve due to
the client from the Factor as an asset,
without a concomitant liability for the
funds so advanced, a liability which
would appear on the balance sheet
if the relationship were portrayed as
one of lender and borrower. The fact
that invoices might be purchased at
recourse does not affect the nature of
the transaction. While this feature of
factoring is understood mostly only
by those with some financial background, it is understood on some level
by a client without such accounting
knowledge.
Charging back an invoice to a client
when it is considered to be uncollectable by the Factor will result in the
following entry in the Client’s ledger:
• Dr Receivable
Customer XYZ
• Dr. Factoring Fee
• Cr. Due to Factoring
Company
14 The Commercial Factor | Summer 2010
$1,000.00
$50.00
$1,050.00
This leaves a balance due to the Factor
of $875, being the initial advance, the
Wire Fee and the Factoring Fee.
Of course, this does not take into
account any further treatment of
Customer XYZ in Client’s ledger, which
does not have any impact on the transactions between the Client and Factor.
While I am reasonably sure that most
Factors do not give Clients any input
as to the nature of these accounting
entries, I have found it useful and a
good service to give out this information at the time of initial funding. A
good client is one that, among other
things, keeps accurate financial records,
does not “fly by the seat of its pants” and
so providing this information in tabular
form contributes to a better understanding of accounting requirements
and the Client-Factor relationship.
Even some CPA’s are grateful for the
clarity this bestows on the situation and
makes their lives easier.
So, like the venerable (and venerated)
partner in my tongue-in-cheek attempt
at humor above, remember that it is
sometimes the simplest of tools that
make the running of a complicated
machine that much easier. Keep YOUR
balance! •
Jonathan
Freedberg
is a Principal
of Aberdeen
Funding. He
graduated
from the University of Cape Town
with a B. Commerce degree and
subsequently became a Chartered
Accountant (South Africa). He
has had many years experience in
Public Accounting and Auditing,
Financial Management, and as a
faculty member at the University
of the Western Cape in Cape Town,
South Africa. He immigrated to
the US in 1985 and established
Aberdeen Funding Inc. in 1994. He
can be reached at 404-303-1545 or
[email protected].
The Commercial Factor | Summer 2010 15
legal factor
BY John A. Beckstead, Esq.
Unapplied Collections and
Unclaimed Property Laws
Unapplied collections and state
unclaimed property laws are a trap for
the unwary. When a factor falls into the
trap, the hole can be very deep and carry
severe consequences. Inexperienced
factors often don’t have any idea there
is a problem building.
Unapplied collections are payments
received from an account debtor which
cannot be matched to a purchased
invoice. Usually, after a period of time,
the payment is eventually matched
but in some cases a match is never
found, even after asking the client and
the account debtor for information
and instructions. The reasons why
this happens are varied. Sometimes
it is the result of delay in the account
debtor updating the payment information in its computer system. Some
large account debtors won’t go to
the trouble of tracking down a small
payment. Coding errors by the account
debtor can create the problem. The
payment doesn’t match any purchased
invoice and the account debtor ignores
requests for information. What should
the factor do with the unapplied
collection?
The unapplied collection should never
be given to the client without written
authorization of the account debtor. A
payment sent by mistake can always
be demanded by the account debtor.
One option is to return the unapplied
collection to the account debtor. Many
factors instead choose to take the
unapplied collection into income after
a substantial period of time, usually one
to two years, without any request for
refund. The danger in doing so is state
unclaimed property laws, also known as
escheat laws.
State escheat laws have been in
existence for many decades. They are
usually referred to as an Unclaimed
Property Act. They were adopted to
prevent businesses from receiving a
windfall from unclaimed property. The
statutes typically target things like
bank accounts which become dormant
and the owner cannot be located, gift
certificates that are never redeemed, or
refunds for which the payee cannot be
located. Rather than allow the business
to keep these unclaimed payments,
after a period of several years the
funds or other property escheats to the
state. The company must tender the
money or other property to the state.
States typically require any business
in possession of unclaimed property
to file an annual report with the state
identifying the unclaimed property. It
is an honor system, similar to filing a
tax return. Some states are aggressive
in enforcement of these statutes and
will send out inquiries and investigators if they think a company may have
unclaimed property. Failure to file an
annual report triggers penalties and, in
some states, is a crime.
There is a Uniform Unclaimed Property
Act that has been adopted by some
states but the scope and requirements
vary widely from state to state. A
prudent factor will familiarize itself
with the escheat laws in each state from
which it received payments, as well as
the state in which it is located, before
taking those payments into income. A
state by state analysis must be done to
determine in unapplied collections are
subject to any unclaimed property act.
Failure to do so may result in the factor
one day suddenly discovering a significant liability to turn over unclaimed
property, for interest and penalties,
or worse. Better to be proactive than
surprised.•
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 | Summer 2010 17
fraud detection
The Unknown
Variable and Fraud
The unknown variable is alive and well. It will continue to be
a catalyst for long time, trusted clients to take advantage of
and exploit. The good news is such techniques are no longer
so “unknown.” BY Barry Minkow
British Petroleum is not a fraudulent company as would be defined by the likes of
Enron, Bernie Madoff and my former company, ZZZZ Best Company, Inc. However,
the company finds themselves dealing with the fate of what is often the typical
undoing of those of us who perpetrate financial fraud. For lack of a better name, I have called this the “unknown variable.” Simply defined,
the unknown variable is that thing that occurs that cannot be planned for that
becomes the catalyst for the uncovering. For example, in my case it was an article
that appeared in the Los Angeles Times documenting, in comparison to a company
with a then market cap that exceeded $300 million dollars, an immaterial and
already settled $60,000 merchant credit card fraud perpetrated to meet the ever
insatiable demand for cash that it takes to promulgate a massive ponzi scheme. In the case of Bernie Madoff it was the unpredictable collapse of the financial
markets which led to a ‘run on the bank’ of investor redemptions that could not be
met. In the case of Dennis Koslowski it was an attempt to dodge the sales tax associated with the purchase of six paintings totaling $13 million dollars by shipping it to
New Jersey instead of Manhattan. These actions caused the media and others to
ask the dreaded “what other short cuts might Mr. Koslowski be taking” and the rest
is history. The unknown variable can be anything from a falling out among thieves
to, as was the case with my friend from Englewood, Colorado Federal prison, Jim
The Commercial Factor | Summer 2010 19
fraud
Donahue, a brilliant Stanford educated
mathematician who managed over $100
million dollars but he could not have
anticipated that the United Airlines
deal would be derailed by the sudden
and unpredictable invasion of Kuwait
by Sadam Hussein.
In like manner, when British Petroleum
PLC submitted their 582-page regional
spill plan for the Gulf of Mexico, and
its 52-page, site-specific plan for the
Deepwater Horizon rig, it was riddled
with material inaccuracies ranging
from the reliance on a scientific expert,
Professor Peter Lutz, who died in
2005 to the listing of the names and
phone numbers of several Texas A&M
University marine life specialists
which, according to the Associated
Press, were flat out wrong. What was
the reason behind the sudden scrutiny of a boilerplate document? The
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E-mail: [email protected]
unknown variable in this case came in
the form of an unprecedented environmental catastrophe that has hit
the shores of New Orleans, Alabama
and Florida. Executives who compiled
this 2009 report could have never
anticipated that the Associated Press
would one day, less than a year after its
submission, comb over every detail of
the report. Although the document was
not relied upon to make an investment
decision, it was the typical, standard,
template-like report that is required by
the EPA to green light the deep water
excavation of oil. There is an old saying that to a
carpenter with a hammer, every
problem looks like a nail. As a former
fraud perpetrator, I have tried—albeit
not very successfully, to be a proactive
fraud uncoverer--and I cannot help
but see so many points of similarity
between the techniques accepted as a
normal course of doing business today
for so many companies and those I
utilized, much to my shame, perpetrate
the ZZZZ Best fraud. Thus the question becomes: what other company
is utilizing the practices of British
Petroleum? Well, sadly, that answer
remains “unknown” but here are a few
things to consider that I call “red flags
for fraud for factors.”
The first thing to remember is the
common mistake factors make is when
they drop their due diligence guard on
existing, long term-clients and rather
reserve their focus and resources for
extensive due diligence on those ‘new
clients’. However, this approach does
not take into account the possibility
that an unknown variable has, unbeknownst to the asset-based lender,
crept into the equation of the existing
customers “world” and has thus created
a sudden need for large amounts of
cash. With that in mind, here are a few
due diligence steps that can be taken
that will help identify a company in the
midst of an ‘unknown variable’ crisis.
First, is the volume consistent with
the industry? That is, if the request
for factoring comes from a client in
the apparel business, is that volume
industry-consistent—especially when
one considers the current economic
downtrend. Second, remember just
how far we who perpetrate fraud will go
fraud
when desperate for money. In the case
of ZZZZ Best, we created twenty two
thousand fraudulent documents to fool
the auditors. In the case of WorldCom,
they actually began amortizing
expenses like travel. In the case of
Steve Weimer, the former Coloradobased fund manager, he took the clean
audit opinion letterhead provided by
a big four accounting firm and placed
that clean opinion on his unaudited
numbers betting that no one would call
the auditors to confirm whether or not
the opinion belonged to Mr. Weimer’s
fund.
In other words, never underestimate
just how far we will go to fool the
factor. Third, watch for sudden outof-the-ordinary kindness. In my case,
I intentionally befriended the audit
partner’s family to blur objectivity. It
is difficult to think the worst about
someone who you truly like and want
to believe. If an increase in a credit
line request is accompanied by outof-the-ordinary invitation to a social
event, watch out. Finally, watch for an
increase in debt for the entity that is not
Barry Minkow
is an executive
and co-founder
of the Fraud
Discovery
Institute,
a licensed private investigating
company that uses ex-convicts
alongside seasoned auditors to
prevent and detect ongoing whitecollar fraud. Barry made headlines
for being the youngest person in
U.S. business history to take a
company public before he was 21
years old. However, his company,
ZZZZ Best Co., Inc. (which at one
time had a $300 million dollar public
stock evaluation) was built on fraud
and deceit. He amassed over $20
million in loans from 15 different
banks, all for a company whose
actual revenues were 90% less than
what they reported. For this, he
was incarcerated for 7 years and 4
months. Barry was a speaker at the
recent IFA 2010 Spring Conference in
Scottsdale, AZ. He can be reached at
[email protected].
consistent with comparable borrowing
within the industry. For example, why
did ZZZZ Best need a seven million
dollar credit line? This was unheard
of at the time for those in the carpet
cleaning industry.
Factors are experts, intentionally or
otherwise, on multiple industries and
this knowledge of the industry in question is always the best defense. Read
trade publications and stay abreast of
changes that have hit the borrower’s
industry. That knowledge is a front line
defense to identify potential red flags
and prevent the factor from becoming a
victim of fraud.
So there you have it. The unknown
variable is alive and well. It will
continue to be a catalyst for long time,
trusted clients to take advantage of and
exploit. The good news is such techniques are no longer so “unknown.” •
Stay Tuned IN
and Up-To-Date
with IFA’s New
E-Newsletter
IFA is proud to announce our new
weekly E-Newsletter. You’ll receive
an email in your in-box with the
following updates:
• Member news and announcements
• IFA event updates
• Sponsored ads from IFA Vendors
• Industry-related data
• And more!
Start looking in your in-box soon for this valuable
and informative IFA E-Newsletter!
If your company is interested in advertising and sponsorship
opportunities or would like to submit press releases and
announcements, please contact Lisa Rafter at
215-765-2646 or [email protected]
The Commercial Factor | Summer 2010 21
what’s new at ifa
American Factoring Association:
April 2010 Lobbying Efforts
By David Jencks, Esq.
I was pleased to take part in The
American Factoring Association’s
lobbying efforts in Washington, D.C. on
April 26th through April 28, 2010 along
with Bob Zadek and Allen Frederic.
The Association’s lobbying firm, Jones
& Walker, provided expansive access
to Senators, their respective staffs, and
administrative policy makers involved
with financial services regulation.
Our visit focused on two primary issues.
First, the role factoring can play in
assisting with the Obama administration’s goal of making capital available
to small and distressed business, and
second, the importance of maintaining
uncomplicated and available financing
for those businesses via factoring.
The Office of Comptroller of the
Currency seemed particularly interested
in the role factoring could play in helping
distribute the funds the Obama administration has designated for assistance to
small businesses. It suggested discussing
with the Department of Treasury a
program where Factors could access
these funds at minimal cost for further
distribution to business via factoring.
Of course, a significant concern is the
regulatory requirements that may come
with accepting government funds.
We met with the staff of the Committee
on Small Business and Entrepreneurship
which expressed the same interest in
how the financial product of factoring
could assist in the distribution of funds
to businesses in need.
Our group also took the opportunity to
discuss the Association’s concern in the
current increased regulatory environment that government regulation of
factoring would hinder the ability of
factors to operate and provide financing
efficiently and quickly. We discussed the
effects increased regulation of Factors
would have on the small, emerging and
distressed businesses that so many
Factors serve, and the potential negative effect increased regulation could
have on the availability of credit for
such businesses. Senators Shelby from
Alabama and Senator Thune from South
Dakota shared those concerns along with
us and indicated that the Association
should keep them advised of legislation
that could ultimately negatively affect
Factors’ ability to provide credit.
The American Factoring Association’s
lobbying efforts also provided an excellent opportunity educate Senators and
administrators alike about exactly what
factoring is and the larger role it plays
in the country’s credit system. I was
pleased to see how many people we met
with truly appreciated learning more
about factoring and I believe each of
them was impressed with the speed and
level of access factors provide in making
credit available to business.
In light of the financial turmoil of
the last two years, and the apparent
regulatory mood of the administration
and Congress, The American Factoring
Association deserves our support in
both proactive educational efforts and
careful monitoring of the effects on
Factors of increased financial regulation
in Washington. Our trip was an excellent start to the Association’s efforts,
but ongoing work in Washington will
undoubtedly be necessary.
David Jencks is an attorney
providing services to factors across
the United States. He can be reached
at 605.256.0121 or davidjencks@
gmail.com
AFA Members & Donations
Diamond Member ($10,000+)
Bibby Financial Services, Inc.
First Capital
International Factoring Association
Platinum ($5,000 - $9,999)
Advance Business Capital
Allied Affiliated Funding
Crestmark Bank
D & S Factors
Gulf Coast Business Credit
J D Factors
LSQ Funding Group, LC
Gold ($2,500 - $4,999)
Apex Capital, LP
Bay View Funding
Far West Capital
Federal National Payables, Inc
Freight Capital
Goodman Factors
Great Plains Transportation Services
Interstate Capital Corporation
Lenders Funding, LLC
22 The Commercial Factor | Summer 2010
Prime Financial Group
PRN Funding, LLC
Riviera Finance
Sunbelt Finance
TBS Factoring Service, LLC
Vertex Financial Corporation
Silver ($1,000 - $2,499)
AGR Financial, LLC
Capital Solutions
Commercial Finance Consultants
Factors Southwest
Hartsko Financial Services, LLC
J.O.B.E. Services, Inc.
Maple Trade Finance, Inc.
MP Star Financial
Paragon Financial Group, Inc.
Phoenix Capital Group
Primary Funding Corporation
RMP Capital Corp.
The Hamilton Group
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.
FirstLine Funding Group
Global Technology Finance
K & L Finance Company, LLC
Levinson Arshonsky & Kurtz, LLP
Prosperity Funding, Inc
Resource Business Partners
Spectrum Commercial Services
Company
Other (Under $500)
Cash Flow Financial, LLC
Epstein, Becker & Green, P.C.
Saint John Capital Corporation
IFA Fraud Detection
Training Course
IFA CALENDAR
OF EVENTS
October 6-8, 2010 Rio All Suite Hotel & Casino, Las Vegas, NV
Common Sense is Not Very Common
July 15-16
Chances are you have already lost money to fraud- perhaps more money than you may
realize. Most of the time fraud victims believe they are not really at risk. Businesses often
fail to put “common sense” basic protective measures in place. Here are some of the true but
startling statistics about fraud in America:
More than 1,400,000 checks are forged every day. Cost in losses to U.S. businesses:
$27.3 million daily.
The average bank robbery in this country nets $250, but the average high-tech crime
nets at least $50,000.
How to offer PO, LC
& Inventory Financing
Treasure Island Resort & Casino
Las Vegas, NV
July 22
Account Debtor Litigation
Teleconference
Teleconference, 1PM PDT
Employee fraud costs businesses $400 billion in annual losses.
August 26-27
Projected losses due to telemarketing and direct marketing fraud schemes alone are
more than $40 billion annually.
Transportation Factoring Meeting
Intercontinental Kansas City
at the Plaza, Kansas City, MO
Millions of people are victimized every year by Identity Theft. The average time to
straighten things out and clear the damages takes two years.
The IFA is pleased to announce a new course on fraud detection and monitoring techniques.
This course will be held October 6-8, 2010, at the Rio All-Suite Hotel and Casino in Las
Vegas, Nevada. The old adage in the commercial finance sector is that if you haven’t had a
client commit fraud which resulted in the loss of capital then stick around because it will
happen to you eventually.
While being alert on the front end of a transaction when booking business is the goal,
there are still factoring companies that get burned even though the factor does all the due
diligence possible. IFA members have voiced their concerns over the real threats that exist
to their capital, thus the creation of this special seminar. Some of the topics covered will be:
What is fraud? • Is your company an easy target? • Why do clients commit fraud?
Types of fraud • Detection techniques • Classic signs of fraud • How to detect fraudsters
What makes someone commit a fraud? • Inside the brain of a fraudster
Financial statement analysis • Field audits • Case study analysis
Learn from the pros on how to not become a victim. The instructors for this course were
chosen based on their extensive knowledge on fraud detection and the factoring industry.
Jay Atkins – President, First Growth Capital. Jay’s financial career began over 19 years ago
where he worked as a credit analyst with a large New Jersey-based bank. More recently, Jay
was President of Assured Consulting, Inc., a unique South-Florida based firm he launched
in 2006.
Darla Auchinachie – Consultant. Darla has been involved in commercial finance for more
than 18 years, serving as Operations Manager for several national factoring companies and
has established a solid reputation as a consultant for Factoring operations throughout the
US and Canada.
Greg Hartley – President, Mind at War. Greg began his career with the U.S. Army, teaching
interrogation and resistance to interrogation, as well as providing interrogation support to
Special Forces in Operation Desert Shield.
Steve Keyser – Keyser Associates. Prior to forming Keyser Associates, Steve ran the national
field examination department for LaSalle Business. During this time, Steve developed a
management program recruiting and training field examiners serving as LBC’s pipeline for
junior loan officers and underwriters.
Barry Minkow – CEO, Fraud Discovery Institute. Barry made headlines for being the
youngest person in US business history to take a company public, however, his company,
ZZZZ Best Co., Inc. was built on fraud and deceit. Mr. Minkow served over 7 years for his
crime and since his release from prison, has traveled the country speaking about fraud.
September 23-24
Face Reading for the Factor – A
Breakthrough in Communication
Gaylord Texan, Dallas, TX
September 27-28
Commercial Finance Workouts
Rio All Suites Hotel & Casino,
Las Vegas, NV
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
January 27-28, 2011
Presidents & Senior
Executive Meeting
Atlantis, Paradise Island, Bahamas
April 13-16, 2011
2011 Factoring Conference
Omni Shoreham, Washington, DC.
Don’t become a victim! To register for this meeting, please go to www.factoring.org or call
the IFA at 800-563-1895 for more information.
For details about IFA
events, please visit
www.factoring.org
The Commercial Factor | Summer 2010 23
IFA 2010 Training Schedule
Issues to Consider when Litigating Against Account Debtors Teleconference
Thursday July 22, 2010 • 1:00 PM PDT • Scot Pierce, Esq. from Bracket & Ellis, P.C.
Fee: $40 ($50 for Non-IFA Members)
This teleconference will address a variety of issues for factors to consider when litigating
against account debtors. The goal is to help factors understand what these lawsuits generally
entail so they can better prepare for this type of litigation and make more informed decisions.
Scot Pierce is a shareholder with the law firm of Bracket & Ellis, P.C. in Fort Worth, Texas.
Transportation Factoring Meeting
August 26-27, 2010 • Intercontinental Kansas City At The Plaza, Kansas City, MO
Fee: $795 ($845 for Non-IFA Members)
This meeting will feature various speakers and plenty of time for networking. We will
begin with a welcome reception on Wednesday evening. Thursday will begin with a lecture
followed by a group discussion. There will be another speaker from the transportation
industry with additional time for discussion. Friday we will focus on credit with a group
credit discussion.
Moderators are:
Bryan Alsobrooks - Executive Vice President, Crestmark TPG, LLC
Steve Hausman - President, Advance Business Capital
Legal Council:
David Jencks, Esq. - Attorney, Jencks & Jencks
Face Reading for the Factor – A Breakthrough in
Communication Training Class
NEW!
September 23-24, 2010 • Gaylord Texan Resort, Dallas, TX
This class will provide participants with an accurate and immediate assessment tool to
better understand every person they meet. Input will include how to immediately read
anger, stress, deception, confusion and wariness on another person’s face.
Instructors are:
Mac Fulfer, Esq. - Amazing Face Reading
Ann Marks - Young Presidents’ Organization (YPO)
Commercial Finance Workouts
with Bob Zadek, Esq. from
NEW!
Buchalter, Nemer
September 27-28, 2010
Rio All Suite Hotel & Casino, Las Vegas, NV
Fee: $1495 ($1595 for Non-IFA Members)
Constantly updated to cover the latest
legal developments and most up-to-date
strategies, this is a hands-on course that
goes deep into the details of loan workouts.
This comprehensive course will help loan
workout professionals and their counsel
build and strengthen their knowledge and
understanding of a secured loan workout.
Fraud Detection &
Monitoring Techniques
October 6-8, 2010
Rio All Suite Hotel & Casino, Las Vegas, NV
Fee: $945 ($1095 for Non-IFA Members)
•What is and isn’t fraud?
•When fraud happens - new applicants and
existing relationships
•Is your company an easy target?
•Clues to watch and listen for
•And more!
Instructors are:
Jay Atkins - President, First Growth Capital
Darla Auchinachie - Consultant
Greg Hartley - President, Mind at War
Steve Keyser - Keyser Associates
Barry Minkow - CEO, Fraud Discovery
Institute
Small Factors Workshop
October 14-15, 2010
Rio All-Suite Hotel & Casino, Las Vegas, NV
Fee: $645 ($695 for Non-IFA Members)
Small Factors have unique needs. This
workshop is designed to give small factors
a forum to discuss and learn. Emphasis will
be on round table discussion, networking
and education.
Moderators:
Jeff Callender - President, Dash Point
Financial Services, Inc
Ryan Jaskiewicz - President, K & L Finance
Company, LLC
Legal Council:
David Jencks, Esq. - Attorney, Jencks &
Jencks, P.C.
Sales & Marketing Training Class
November 4-5, 2010
Rio All Suite Hotel & Casino, Las Vegas, NV
Fee: $945 ($995 for Non-IFA Members)
•Increase Your Hit Ratio
•Developing More Business in a
Bad Market
•The Basics of Marketing
•And More!
Instructors are:
Thomas Siska - President & CEO, Working
Capital Solutions, Inc.
Kevin O’Hare - President, Graystone Capital
On Line Registration at factoring.org
or [email protected].
Or call 1-800-563-1895 for more
information.
24 The Commercial Factor | Summer 2010
Our Preferred Vendors have undergone a screening and evaluation process. When you contact the
Preferred Vendors, you will need to indicate that you are an IFA member to receive your benefit.
If you offer a good or service to the Factoring Industry and are interested in applying for Preferred
Vendor Status, please contact the IFA at 805-773-0011.
(As of June 2010)
Certified Email
debtors using separate accounts.
888-411-9661 • www.carrier411.com
[email protected]
RPost
Experian
RPost’s Registered Email services allow factors to
end disputes attributed to missing, misplaced or
denied receipt of notification emails for notices
of assignment, notices of default, borrowing base
certificates, and other important notifications. It
also helps speed invoice collections with proof of
invoice delivery irrefutably starting the accounts
receivable aging clock.
IFA Members receive a $10 discount per 100
pack. Also, the first order from each company
will be doubled.
619-584-4088 • www.rpost.com/partners/ifa
[email protected]
Consulting
FactorHelp
FactorHelp has come to be regarded as the factoring
industry’s premier resource provider. Their manuals, in use
on every continent of the world, are setting the industry
standard and their reputation as the one-call solution for
factoring problems is growing. By consistently introducing
innovative, viable products, vigilantly cultivating an
extensive alliance of Strategic Partners and providing the
professional expertise demanded of an industry leader,
FactorHelp strives to maintain its goal of providing the
unparalleled service the factoring industry expects from a
solutions partner.
IFA Members receive a discount of 10% on their
consulting fees and 5% discount on all FactorHelp
products in the IFA store.
972-722-3700 • www.factorhelp.com
[email protected]
Factor Source
Factor Source provides cost effective, value based
solutions as an independent, strategic resource
for factoring and ABL companies nationwide. The
Factor Source team has significant experience
in financial services, factoring and asset based
lending. They specialize in sales, operations
and risk management training; strategic growth
analysis and execution; work flow and processing
efficiency; platform transformation - from start-up
to mature organizations; work-out, fraud and
troubled client assistance; contract underwriting
and risk management; and financing /buy/sell
expertise and resources.
Factor Source will provide IFA members
incentive discounts of ten percent off the
standard pricing arrangements.
214-351-2882 • www.factorsource.com
[email protected]
Credit
Ansonia Credit Data
Ansonia Credit Data is the only credit reporting
company created specifically for the Factoring/
ABL industry. The reports are easy to read with
concise ratings that tell you what you need to know.
Unlike competitors, there are no up-front costs,
membership fees, or contracts.
IFA Member Benefits: 20% off the Alert System.
The Alert System sells for $25 per month. In the
event that the Alert System is discounted or
offered in other promotions, an additional benefit
to IFA members may be required.
877-218-2056 • www.ansoniacreditdata.com
Carrier411 Services, Inc.
Carrier411 Services, Inc. provides several web-based
services used by factors. Carrier411.com enables
factors to qualify and monitor clients and debtors
for changes in their insurance, authority and
safety. Factor411.com is a free web-based customer
relationship management system used by factors
to manage relationships with potential clients,
existing clients and account debtors more efficiently
and effectively. Debtor411.com, is our new online
credit service used by transportation factors.
IFA members receive a 33% discount on Debtor411
credit reports. For Carrier411 services, we offer a
10% discount to factors that monitor clients and
Experian is the industry leader when it comes
to credit information on small to medium sized
companies.
IFA Members receive Experian business credit
information at a special reduced rate.
224-698-8933 • www.experian.com
[email protected]
Transcredit
The “pacesetter” in transportation Credit Reports
and Freight Bill Collections. Our exclusive
transportation Credit Score & Days-To-Pay® is
used by every load posting service in the USA &
Canada. 2006 begins our 20th year of service to the
industry and TransCredit is leading the way with
innovative products from TransCredit Online®.
Three months free of the monthly access fee per
year. Free period would be for the final three
months of the period.
800-215-8448 • www.transcredit.com
[email protected]
Credit Card PROCESSING
ePaymentAmerican – formerly TX Direct
ePaymentAmerica, formerly TX Direct, is the
nation’s leading provider of merchant services
for the factoring industry. We offer IFA members
exclusive benefits with our premier product,
eFactorPay, which provides low-risk, high-return
options for accepting credit cards, debit cards, ACH
and eChecks as payment from your clients and
their customers.
IFA Member Benefits: Member-Only Rates,
Waived Application Fees, Waived Online
Statement Fee.
901-385-5335 • www.epaymentamerica.com
[email protected]
FIELD EXAMS
Bluewater
Bluewater’s Portfolio Review and Best Practices
Assessment services provide an independent
review to assess a factor’s adherence to its policies
and procedures and industry best practices.
Bluewater also conducts an independent
measurement of credit risk within a factor’s
portfolio increasing awareness, which results
in better credit decisions. Because we are not
affiliated with any factor or alternate service
company, we are not conflicted in any way and
can provide an objective opinion of best practices
adherence.
IFA members receive 10% off our consultancy fees.
801-508-2599 or 586-558-8888
www.consultbluewater.com
[email protected]
FUNDING
RMP Capital Corp.
RMP Capital Corp. is a national provider of
Portfolio Management Services and Rediscounting
Programs to Independent Factoring Companies
offering Accounts Receivable based financing
for small to medium sized businesses. They also
provide Transportation Financing, Contractor
Financing and Risk Management Services for
contractors working on Public Works Projects.
IFA Member Benefits: RMP Capital Corp. will pay
your IFA membership yearly dues.
631-738-0047 • www.rmpcapital.com
Marketing
50 Words Marketing, LLC
50 Words is a marketing outsource firm for
companies that either do not have a marketing
department or that need to add more manpower to
their existing marketing team. They serve as your
dedicated marketing department.
IFA Member Benefits: IFA Members will receive
five free hours of marketing.
610-631-5702 • www.50wordsmarketing.com
PO Financing & LC’s
Hartsko Financial Services, LLC.
Hartsko is the leading source of Purchase Order
Financing. Their deals range from 50,000
to 5,000,000. They specialize in domestic,
international (thru letters of credit) and minor
assembly (bagging and boxing) transactions.
Remember the first step is a credit worthy
Purchase Order.
IFA members will receive a 12% commission.
Members will also receive right of first refusal for
deals in which a factor is not previously involved.
718-229-0440 • www.hartsko.com
[email protected]
Recruitment Agency
Commercial Finance Consultants
Established in 2002, CFC is the premier provider
of human talent to the factoring industry. CFC’s
goal is to provide their clients with the best
available human capital and the most current
industry information to assist in accomplishing
their growth potential.
IFA members will receive an additional 60 days
added to the guarantee on all placements.
469-402-4000 • www.searchcf.com
[email protected]
Software
Bayside Business Solutions, Inc.
Bayside Business Solutions, Inc., is an established,
leading, global provider of superior software
applications for factoring, invoice discounting and
asset-based lending. A nimble company, Bayside
is able to quickly leverage changes in technology
and finance into better tools for their users.
Bayside prides itself on world-class service and
responsiveness.
IFA members will receive 10% off license fees
and add-on modules. For IFA members who
are currently Bayside customers: Free one day
refresher course, per year, at Bayside’s training
facility in Birmingham, AL.
205-972-8900 • www.baysidebiz.com
[email protected]
FactorFox
FactorFox is a web-based factoring software
program developed by a factor, for factors. Any
time you choose, 24/7/365, you and your clients
can enter schedules online, view and save online
reports and mutually share documents. These are
done without manual web uploads and without
paying extra for these features. FactorFox is
designed for smaller factors.
IFA members will receive two months free usage
of the software. This will be given above and
beyond any other trial or usage time limits.
800-509-6088 • www.factorfox.com
[email protected]
UCC Search
First Corporate Solutions
First Corporate Solutions is a full service public
records provider specializing in the research,
retrieval and filing of public records nationwide
and internationally. Their services include
industry standards such as UCC, lien and litigation
searching, UCC and corporate filing services,
nationwide registered agent coverage and real
property title searching, as well as unique solutions
such as state and county account monitoring
designed specifically for Factors.
IFA members will receive a 10% discount off of
the retail rates of their signature state and county
account monitoring product. Larger discounts
will be offered based on volume
800-406-1577 • www.ficoso.com
[email protected]
The Commercial Factor | Summer 2010 25
industry focus: government
Federal Government
Factoring Update
The government spent in excess of $500 Billion on contract goods and
services in fiscal year 2008. This market will continue to be a robust growth
opportunity for those factors who seize the opportunities and diligently
mitigate the risks. BY Kwesi Rogers
As Shirley Temple Black also known as Little Miss Shirley
Temple so eloquently stated “Our whole way of life is dedicated to the removal of risk. Cradle to grave we are supported,
insulated and isolated from the risks of life and if we fall our
government stands ready with Band Aids of every size.” When
my kids fall and draw blood they often ask for a $.25 superhero
band aid to facilitate the healing process. When the United
States’ economy fell into a tailspin in 2007 our government
passed the American Recovery and Reinvestment Act, delivering the $787 Billion “band aid”. But just as a child suffers a bit
when the wound’s goo, hardened in the gauze, pulls away some
tender new flesh, the government contracting community is
experiencing an “ouch” with some of the new stimulus control
initiatives proposed by the Obama Administration. Control,
making the money a little less free, becomes the first step in a
removal process and it creates both risks and opportunities.
Compliance, Ethics and Internal Controls
For all federal government contracts exceeding $5,000,000
in value and spanning a period greater than 120 days contractors must have a written code of ethics and conduct with an
emphasis on commitment to compliance with procurement
laws and regulations, internal corporate policies, prompt
internal reporting of violations and clear penalties for violations. The administration did take into consideration that
small businesses have few resources to administer training
programs and exempt small business from the ongoing
training requirement. In many cases these new ethics laws are
also applicable to companies rendering a service to the government indirectly as a subcontractor.
26 The Commercial Factor | Summer 2010
A factor financing a small business found in violation of the
government’s recent compliance and ethics regulations could
experience consequences that weaken the customer and
prohibit or delay collection of the accounts. However where
there is risk there is opportunity for factoring companies.
Borrowers, performing well financially and obtaining financing
from banks, could find themselves in violation of their lenders’
covenants if they run into trouble on these new compliance
and ethics standards. This could turn an otherwise bankable
business into a customer who needs factoring assistance to
recover.
For many reasons, prime contractors frequently employ
subcontractors on federal jobs. It is common for the subcontractor to invoice the prime contractor and, according to the
subcontract, receive payment when the prime contractor is
paid by the government. What happens if the prime receives
the money and does not pay the subcontractor? The subcontractor will eventually complain to the government. Is this a
violation of ethics standards? Are the subcontractors accounts
less risky to factor as a consequence? Though this application of the standards is unlikely it is not outside the realm of
possibility.
Insourcing
The Obama Administration has made Insourcing a priority.
Insourcing policy establishes that inherently governmental
work should be performed by federal employees and not
vended out to private contractors. Insourcing is a major
piece of the Obama Administration’s acquisition reform
agenda. The Administrator for Federal
Procurement Policy at the Office of
Management and Budget, stated that
the Obama Administration’s 2011
budget proposal will “rebalance” the
relationship between the government
and its contractors through more
oversight and Insourcing. The current
budget proposes adding nearly 20,000
new civilian and military personnel
to the Department of Defense and
spending $158 million at civilian
agencies to hire over 10,000 acquisition
personnel to perform work now done
by contractors. The budget goes on to
say that acquisition support functions
and information technology support
will represent about one third of the
jobs that are Insourced. Therefore
if you are factoring a government
contractor that does approximately
$10 million in annual revenue with the
government and has approximately
75 employees providing information
technology support and acquisition
support services they could lose up
to 50% of their billable employees to
Insourcing. A factoring client that
suddenly loses 50% of its revenue will
place the borrower under significant
stress. All veterans of the factoring
industry know the measures to which a
desperate client may resort when their
backs are up against the wall. But again
there is the silver lining to this dark
cloud. Under such circumstances, there
are sure to be opportunities for factors
to assist in the recovery of government contractors ejected from banks
because they were adversely affected by
Insourcing.
Contracting and Tax
Accountability Act of 2009
The Contracting and Tax Accountability
Act of 2009 prohibits the award of a
contract or grant which exceeds the
Simplified Acquisition Threshold
to contractors that have “seriously
delinquent” tax arrearages. In the past,
factors fairly routinely financed federal
contractors delinquent with their taxes
if a negotiated payment agreement was
in place with the IRS. The Contracting
and Tax Accountability Act makes such
factoring relationships more difficult to
approve. Certainly a contractor’s ability
to satisfy their obligation is predicated
upon the company having sufficient
revenues to meet the payment schedule.
However, the act essentially requires the
repayment according to the agreement
but also prohibits new awards probably
necessary to accomplish repayment
until the obligation is repaid in full.
The politics of the bill aside, factors
considering funding government
contractors with past due tax obligations must consider whether or not
the existing funded contract backlog
will remain stable long enough for the
contractor to satisfy its obligation to
the IRS. As a factor you may consider
simply collecting out if the contracts
are not renewed during their option
years leaving insufficient revenue for
your customer to meet its obligation
to the IRS. That strategy assumes that
as the revenues drop the customer still
continues making payments. If the
customer falls behind you run the risk
that the IRS levy funds due the factor.
The FACA filing gives you legal rights
but the “Service” still has your money.
As Run DMC sang, “It’s Tricky”!
Contract Types
Over the past 20 years the percentage
of procurement dollars spent on service
contracts has grown dramatically
compared to the percentage spent on
products. Most service contracts are
structured as cost reimbursement
contracts. The current administration
has stated that cost-reimbursement
contracts shall be used only when
circumstances do not allow the agency
to adequately define its requirements. In essence the administration
has realized that the contractor has
less incentive to control costs in a
cost reimbursement contract than
they do when performing on a fixed
price contract. The challenge with
this initiative is, fixed price contracts
require a well-defined requirements
section. The government is under
staffed and its contract acquisition
workforce becomes younger and less
experienced as senior staff members
retire in increasing numbers. There
are numerous potential risks and
opportunities here for those interested
in factoring government contractors.
Many small government contractors
do not have the systems or processes
to adequately capture all of the costs
when bidding for new work. These
contractors may succeed in winning
new work but it is unlikely that they
will succeed in turning material profits
that develop into balance sheets banks
would feel comfortable lending into.
On the other hand factors may find that
customers squeezed by cost overruns in
a fixed price contract fail financially at
great risk to the factor. This writer has
seen contractors employ government
provided inputs in their price proposal
only to discover the inputs were incorrect. In some cases, the contractor was
still held to their pricing, incurring
significant losses, regardless of the
government’s error. If this becomes
significant enough, at some point
a factoring customer will become
desperate, a circumstance most factors
would just assume avoid.
Summary
The government spent in excess of
$500 Billion on contract goods and
services in fiscal year 2008. This writer
is not aware of another industry that
grew as fast in the period from 2001
to 2008. New procurement initiatives
are introduced with almost every new
administration. Despite initiatives such
as those discussed above, the government must run and contractors will
continue to play an instrumental role in
how the federal government operates.
The government market will continue
to be a robust growth opportunity for
those factors who seize the opportunities and diligently mitigate the risks. •
Kwesi Rogers is President and Shareholder of Federal
National Payables, Inc., a small business finance
company specializing in providing accounts receivable
financing primarily to government contractors. Mr.
Rogers joined Federal National as Sales Director when
it opened its doors in 1992 and was promoted to the
position of President in January of 2006. Mr. Rogers holds
a BA from the University of the District of Columbia
and an MBA from George Mason University. Mr. Rogers is an active member in
numerous professional organizations. He can be reached atHe can be reached
at [email protected] or 301-961-6450
The Commercial Factor | Summer 2010 27
Reviews & Opinions
Govt Regs May Suffocate
ABL and Factoring
BY NEVILLE GRUSD, C.P.A.
In the past several years the American
economy has experienced historic,
revolutionary developments: The TARP
bailout for a number of American banks
and financial institutions, the largest
number of bank failures in such a short
time frame, and the Obama administration’s radical restructuring of health
insurance.
For many decades, commercial finance
including factoring, asset-based
lending, and purchase order financing
has operated relatively free of government regulation. While there may
be some laws in certain states which
affect the commercial finance sector,
these are generally not exclusive to our
businesses, and they certainly are not
as encompassing as the monitors and
controls which banks, savings & loan
associations, credit unions, and similar
institutions must observe.
Reverberating amidst this current instability of our financial institutions and a
renewed initiative for more aggressive
government oversight is an anti-commercial finance attitude emerging
among our elected and appointed
officials. There are a lot of signals.
For example, we’ve known for a long
time that most bankers have a prohibiting mindset about the proposition of
providing credit lines to factors, assetbased lenders or purchase order finance
firms. They ask: “Why should our bank
give a credit line to a finance company,
when we would not make the small
business loans being made by the finance
company, ourselves?” They argue that
the loans often made by commercial
28 The Commercial Factor | Summer 2010
finance people are to “unbankable”
business entities. They believe these
companies are not strong enough, not
mature enough, with a problematic track
record and worse.
Asset-based lenders and factors are
not lending solely on historical balance
sheets. We are lending mainly based
upon collateral which we manage on a
daily basis (while most banks only look
at financial statements on an annual
basis). We also look at a company’s
future business based on their orders in
the pipeline.
Are these banks receiving warnings from
government monitors that loans in their
portfolios for commercial finance firms
are an anathema? Are regulators casting
phobia among banks that since an assetbased lender’s collateral is their loans to
borrowers who are not bankable---this is
unsound, high-risk paper?
Many banks have complained that
when they have ABL loans on their
books, they are inconsistently treated
by bank examiners, who many times, do
not understand ABL principles. There
is a move among banks to have the
examiners educated in the differences
between regular bank lending and ABL. It is important that they understand
that ABL is often safer than regular bank
lending because of the level of collateral. This should be taken a step further so
that finance companies that make ABL
loans should be recognized because they
monitor collateral more carefully than
banks (which rely on monthly borrowing
base certificates).
Are United States Senator Thomas
Dodd (D-Connecticut) and United
States Representative Barney Frank
(D-Massachusetts) in their sweeping
efforts to tighten government control
on financial institutions, going to seize
upon commercial finance companies as
one of their targets? After all, there are
lawmakers like United States Senator
Mary Landrieu (D-Louisiana) who
have expressed aversion about the
commercial finance sector. She believes
that regulation here will protect small
business owners. Is there anyone in
Congress who can be considered a
genuine enthusiastic proponent of what
we do?
The general feeling within our community is that most Members of Congress
or appointed officials in government do
not really understand what we do. Quite
possibly they have a distorted opinion.
At a recent New York City symposium
sponsored by the International Factoring
Association, attorney Robert Zadek
said that: “Treasury Secretary Timothy
Geithner does not like the idea of nonbank lending. His whole approach is to
control lenders. He didn’t even realize
that there is such a culture as asset-based
lenders, payday lenders, or lenders other
than banks. Geithner thinks: ‘How do
we control their money supply, business
activity or their statistics as a non-reporting entity? We can’t have this. If they
are not regulated, they must be doing bad
things’.”
According to Zadek, “To Geithner and
Treasury Department officials, a lack
of regulation breeds insecurity. People
doing things we don’t know about. How do we know they are not doing it
badly? How do we know they are not
taking advantage? Let’s widen our net
and either stomp them out so borrowers
must rely on banks and government
agencies, or regulate them.”
Further evidence that the Obama
administration and the Congress have
economic policies contrary to banks,
commercial finance lenders, and its
free marketplace is the rapid expansion of government agencies filling
an increasing role. Look at what has
recently happened with the Federal
government eliminating banks and
lenders in the nation’s student loan
programs. The Federal government is
now becoming the total source here. In the past year, more agencies have
been stepping up their outright grants
to small business under a variety of new
programs. The United States Small
Business Administration has been
increasing loans and credit lines often
under credit terms which defy accepted
lending industry principles. And they
do this without any outreach to the
commercial finance sector. Recently, legislation has been introduced by the Obama administration
to provide $30B to small banks designated for small business lending. This has been approved by the House
Financial Services Committee. It is
awaiting action by the full House of
Representatives. ABL’s should use this
legislation as an opportunity to educate
lawmakers and their staff about the
critical role ABL’s play in supporting
small business. They should also
encourage banks to actively provide
capital to non-bank commercial finance
companies.
Meanwhile, all of us as asset-based
lenders, factors, and purchase order
financiers, should be proactively
contacting our local members in the
House of Representatives and the
Senate. As constituents, we need to
ask for meetings with these respective
elective officials so we can educate
them on how our industry works and
the valuable role it plays for America’s
small businesses. (Note: it does not
appear that there is any information
or content on the United States Senate
Small Business & Entrepreneurship
Committee website about asset-based
lending or factoring.)
Why are government policy-makers
so reluctant to embrace our sector as
partners, especially during this
extraordinary high unemployment
crisis when it is universally acknowledged that new jobs through small
business growth is urgent? It is not
far-fetched given the transformation
we have already witnessed in American
banking and finance that a consequence
will be government interference in
what we do. •
Editor’s Note: The views expressed in this
article are not necessarily the views of
the International Factoring Association
(IFA) or its members. Merchant Factors
is not currently a member of the IFA.
The American Factoring Association is
working with lawmakers in Washington
DC in support of the Factoring Industry.
Information about the AFA can be found at
www.americanfactoring.org
Neville
Grusd, C.P.A.
is Executive
Vice President
of Merchant
Factors
Corporation, a 25 year old assetbased lender and factor with offices
in New York and Los Angeles. Mr.
Grusd is a past executive committee
member of the Commercial Finance
Association and an editorial board
member for The C.P.A. Journal, New
York State Society of C.P.A.s. He
can be reached at 212-840-7575 or
[email protected].
Hopefully, our industry organizations like the International Factoring
Association, American Factoring
Association and Commercial Finance
Association can be effective advocates
for our interests and livelihoods at
the United States Capitol. They have
already engaged lobbyists and government relations people to protect our
firms against contrary, perverse government policies and legislative initiatives.
Political action contributions should be
made by firms in our sector to support
this effort.
The Commercial Factor | Summer 2010 29
small ticket factor
BY Jeff Callender
Why Some Accountants
Drive Small Factors Crazy
One of the hallmarks of being a very small factor is working with especially
small business owners who in many cases lack the savvy and sophistication of
owners of larger companies.Factors know accountants can be either our best
friends or worst enemies.
One of the hallmarks of being a very
small factor is working with especially
small business owners who in many
cases lack the savvy and sophistication
of owners of larger companies. Our
clients usually don’t have a business
degree, have little accounting or bookkeeping proficiency beyond the very
basics, and often haven’t yet developed
business know-how that comes from
running a company for many years.
revenue” is pretty much all they want to
hear and understand. Since they don’t
know a debit from a credit, the advice of
their financial record keeper is usually
taken as gospel and rarely questioned
for its accuracy or wisdom. After all,
these owners have a business to run
and the accountant is there to keep the
books – “that’s what I pay him for.”
financing of last resort, who consider
us as the very last type of financing
to which they would ever refer their
clients. Worse are those who consider
(or actually call) us loan sharks,
bottom-feeders, used car salespeople of
the financial world, payday lenders for
businesses, and so on. I’ve heard them
all and so have you.
Our clients are usually skilled technicians of whatever their business
involves, yet they are frequently not
familiar with procedures or practices
that larger business owners (and larger
factors) take for granted. In some
cases, if I ask a very small prospective
client for their business financials, in
response I get nothing more a blank
stare, an awkward silence and then,
“My what?”
Factors know accountants can be either
our best friends or worst enemies. Our
accountant friends are those who “get”
factoring: they appreciate its benefits
and advise certain clients with cash
flow issues that a financial tool called
factoring will solve these problems.
These accountants are the ones who
provide good referrals, clearly explain
to their clients how it works, and are
great go-betweens when the new
client’s account gets set up and the first
invoices are submitted and funded.
In my experience, accountants like
these have never dealt with factors
personally, don’t thoroughly understand what we do or how factoring
works, and don’t usually look much
beyond the discount rates we charge.
When they look at our rates they annualize them, compare them to bank loan
costs, and can’t believe our audacity in
charging such sky-high “interest rates.”
People like this are very dependent on
their accountants or bookkeepers to
give them a simple verbal snapshot of
how their business is faring financially.
“Things look good” or “You need
to decrease expenses and increase
The accountants who drive us crazy are
the other ones – those who unfortunately are in the majority. We have
all dealt with accountants who think
factoring is only for businesses who
are going under, who see factoring as
What these folks fail to consider are
some very fundamental facts: their
client cannot qualify for bank loans or
lines, their credit rating is too low to
qualify for equipment leasing or any
other financing, and the client lacks (or
has already exhausted) the personal
resources to continue funding the
business. These accountants don’t
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].
30 The Commercial Factor | Summer 2010
appreciate the fact that factoring is
not a funding of last resort – it is the
funding of only resort to these clients.
So, incredibly, they either tell their
clients factoring is too expensive, or
they simply don’t inform them of it at
all, either of which all too often leads to
the failure of the business.
Recently a factoring client of mine,
who exactly fits the unsophisticated
business owner described above, called
me. Quite upset she said, “My accountant just told me that I need to get out
of factoring as soon as possible because
it’s ‘eating me alive,’ he said. He told me
I’m paying 40% for factoring and that’s
more than my business should pay.”
In her very next breath however, she
acknowledged her accountant’s lack
of perspective. “But what he doesn’t
understand,” she went on, “is that I
can’t get money anywhere else, and
without money I can’t continue. My
bank closed my credit line and won’t
help me at all anymore. You’re the only
thing that’s allowing me to keep my
doors open.”
I agreed her accountant didn’t really
see the whole picture, and we discussed
exactly what he meant by his 40%
comment. She wasn’t at all clear what
he was talking about, and seemed to
think he meant factoring was costing
her 40% of her revenue, which was
clearly wrong. I told her he probably
meant what many such accountants
think: factoring was costing her the
equivalent of 40% annual interest. I
tried to explain how he was calculating
this but that sailed way over her head.
She was left frustrated for two reasons:
one, that her accountant had said this;
and two, that she couldn’t keep her
company running without the regular
cash infusions from selling her receivables. The latter was crystal clear to her.
he does is keep my books, tell me what
I should do, and then charge me.” The
more she thought about my question,
the more annoyed she became with the
hypocrisy of his advice and his lack of
understanding and empathy.
I think asking an accountant who
disparages factors this very question is
more than fair. Too often such folks just
don’t appreciate the difficulties raised
by their unconsidered advice. And if we
factors are really as bad as they imply,
let’s see them put their money where
their mouth is in funding their higherrisk clients. We charge more, and earn
every penny of it, because we take the
risk on these clients that banks won’t
touch and neither will anyone else,
including them. So just where do they
come off calling us the bad guys?!
Over the years in my factoring and
software businesses, I have noticed
an interesting development. Despite
the accountants who drive us crazy,
some accountants who “get” factoring
realize it is not only a lifeline to their
clients, but offers both handsome and
justified returns they can make as small
factors themselves. It’s not uncommon
for these sharper accountants to open
a small factoring company of their
own in addition to or instead of their
accounting practice, and thus join our
ranks.
These people often become the best
of small factors because they bring
a breadth of financial and business
experience and wisdom and perspective
from which any factoring client will
benefit. Such people have my greatest
respect.
So when you run across an accountant
who is factor-friendly, welcome them
warmly. They are both an ally to our
industry and small businesses, and a
great asset to their clients.
And when you run across one who
disparages what we do and advises their
clients to run in the opposite direction,
just ask them this simple question: “Are
you willing to lend your own money to
clients you advise against factoring?”
Can you imagine a single one saying,
“Why, yes I am – absolutely!! I think
that’s a terrific investment! I’ll get my
checkbook right now!”
Flora can’t. •
Then I posed a question that is one
we factors are justified to ask when
we encounter “advice” like this. I said,
“Flora, I’d like to ask you something
that may sound a bit cheeky, but I think
is a fair question.” Curious, she said,
“Ok, sure. What is it?”
“If you did what your accountant said
and stopped factoring right now, would
he lend you his own money to keep
your company going?” Her immediate
answer was, “No way. He’s so tight with
his money he wouldn’t lend me a dime.
He’s got plenty of money and doesn’t
understand what this is like for me. All
The Commercial Factor | Summer 2010 31
fraud detection
Fraud:
Can You Prevent It?
You may be able to enhance the way you can detect fraud more quickly. Ever since
factoring was identified as one of the most appropriate financial products to support
rapidly growing companies, factors everywhere have suffered at the hands of
fraudsters. BY Jeff Jacobs
The brief answer to this question is of course no!
But you may be able to enhance the way you can detect it more
quickly. Ever since factoring was identified as one of the most
appropriate financial products to support rapidly growing
companies, factors everywhere have suffered at the hands of
fraudsters. It is almost an inevitable consequence of financing
dynamic collateral such as accounts receivable.
Many prudent lenders implement systems and processes
within their organization to try and ensure that when a bad
debt arises, they give themselves the best chance to collect
out their lending exposure. This is commendable and highly
recommended, but the ability to collect out is dependent upon
two key conditions.
The first is that your client is basically honest, even though
circumstances may have driven him to “bend the rules” to get
access to more funding to support his business. The second is
that the invoices you are offered as collateral for financing are
indeed valid invoices, and in the event of the demise of your
client, can be collected out by payments from debtors.
A Desperate Man
In such situations, the client can often be described as under
pressure, opportunistic and desperate to do anything that may
keep his business alive. It is often said that desperate people
will do desperate things.
In many education sessions that we deliver to inexperienced
client managers in the industry, we work on real case studies
32 The Commercial Factor | Summer 2010
and ask the managers to take the role of the client principal.
When presented with the situation that the business they are
managing desperately needs more cash to pay their workers’
salaries by the end of the week, almost every one confirms that
they would raise an invoice to their factor for goods that have
not yet been delivered. They realize very quickly that if they
are prepared to raise the invoice themselves in such circumstances, any client under similar pressure would do exactly the
same.
And the worrying aspect of such client situations is that the
client principal would still believe in his own mind that he had
not committed a fraud.
Often the client principal takes advantage of the client
manager put in place to build a meaningful relationship with
the client; to ensure the client is happy, satisfied with the
service being provided and has access to sufficient funding to
support his business. When the pre-invoicing fraud occurs, the
client manager is often persuaded that the client had intended
to advise him of the rule bending, and the fraud is rationalized
in the mind of the client manager because the client subsequently “confessed”.
We define this as emotional fraud, and unfortunately we
have seen many examples of it in our long experience in the
industry. In this fraudulent life cycle, the first step sees the
client under pressure which forces his behavior of trying to
find ways to obtain additional funding. The second step is
when the client identifies the opportunity, such as raising an
invoice for undelivered goods (fresh air invoicing) to his factor.
The third step is when the client rationalize his behavior in his own mind, as
he truly believes that he is entitled to do
anything to keep his business afloat.
As market conditions remain tough,
more and more businesses will begin
to struggle and create pressure on
client facilities, thereby enhancing the
potential frequency of such desperate
emotional frauds.
Technology
Because of tremendous technological
advances in recent years, factors have
allowed clients to submit invoices for
financing in “soft copy format” using
client access systems, with some even
developing software to extract data
direct from client accounting systems.
Client advances or prepayments are
often calculated automatically by an
operational system.
The majority of these technological
advances are introduced in the
interests of productivity, to ensure
that the factoring company is running
“lean and mean”. The inevitable move
towards higher client/staff ratio merely
encourages less physical interaction
with clients.
The situation therefore increases the
possibility that something will get
missed by the client manager and a bad
debt will ensue.
And of course the technological
advances implemented by the factors
are also a feature of how unscrupulous
clients can build an apparently plausible business, with the sole intention of
obtaining funding by fraudulent means.
Today clients can have PC’s which
can create bogus invoices, which in
turn create bogus sales ledgers, create
false proof of delivery documents and
even create websites for bogus debtor
companies.
The advances in telephone technology
in recent years has also assisted
fraudsters in providing bogus verifications of debt, and even to move funds
between bank accounts using Internet
technology.
Career Fraudster
This is the other type of fraudster. The
career criminal that sets up his bogus
business with the express intention
of defrauding any lender they are to
advance funds. Regrettably, we have
seen many examples of such frauds
in the numerous client cases we have
analyzed over the years.
But worryingly, what we have seen
develop in the last 12 months is the
“sophisticated fraudster” who builds a
client company with the express intention of understanding the rules of how a
factoring company works. Once this is
understood the client can then provide
the factor with exactly which data is
required to obtain funding.
Often the fraudulent client learns the
rules at one factoring company and
then moves to another, claiming that
he has suffered from poor service,
had a bad relationship with the client
manager or any number of other
spurious reasons to convince the
incoming factor that his company is
worth having as a client.
The real reason behind this move is
often that he has “learned the rules”
from the outgoing factor and intends
to make full use of his knowledge as a
client of the incoming factor.
It is much more difficult for a factor
to detect fraudulent activity in such a
situation, as quite often the outward
appearance of the client performance
can be deceiving, with many of the
normal key indicators suggesting that
the client is performing well.
With a large portfolio of clients to
manage, is very easy for the client
manager to overlook such indicators and concentrate his efforts on
those clients exhibiting deteriorating
performance.
Frauds get successfully perpetrated
and losses occur because something
changed and it was missed by the
relationship manager. We would
therefore recommend most forcibly that any lender should adopt the
“Four eyes” principal when assessing
a client or debtor performance. The
second viewpoint of a manager who is
detached from the client relationship
can be invaluable when trying to detect
fraudulent activity by a client.
This approach offers a lender some
protection at least in avoiding
emotional frauds.
We would also recommend that any
procedures and processes established
by a lender should be:
• Developed
• Followed closely
• Improved continuously
A customer of ours once advised me
that “he started every working day from
the perspective that every one of his
clients was out to defraud him”. This
is maybe an extreme approach but
developing a healthy cynicism about
the quality of your client will always
stand you in good stead.
And finally, because of the enormous
growth of the industry in recent years
whilst market conditions have been
very favorable, we now have a generation of client relationship managers and
risk managers who have never worked
in market conditions such as we experience today.
This is where self-built risk management systems and processes, which
are often heavily reliant upon manual
intervention, can enhance the possibility of failing to identify changes in
the client’s behavior quickly enough.
Remember
We have a saying in our business that
“Risk management is about the detection of change”.
A fraudulent client has to get lucky only
once, but you have to stay lucky every
working day. •
Constant education and support for
client managers in these difficult times
should be one of the highest priorities
of any factoring company today.
Jeff Jacobs has over 30 yrs experience in all phases of
the factoring industry holding management positions
at Heller, Talcott, Barclays, CIT and First Capital. He
recently joined RiskFactor as their Director of Business
Development in the US. He can be reached at jjacobs@
riskfactor-solutions.com or via phone at 702-914-0455 or
cell 661-644-3729. Please visit our website at www.riskfactor-solutions.com
The Commercial Factor | Summer 2010 33
an inside look
What factor clients have to say
Q&A with Mike Cagan
Spirit International, Inc.
School Supplies Unlimited, Inc. is a team of individuals with
over 65 years of experience. Mike Cagan, the founder of the
company, believes that public and private schools should
receive top quality products, at a fair price. We asked Mike
to share his decision-making process in choosing factoring and
Dash Point Financial.
IFA: Why did you choose factoring vs.
other types of financing?
IFA: What’s important in the
relationship?
MC: Being a new small business with
no credit, finding financing is difficult.
The economy was bad and banks just
weren’t offering financing. Dash Point
offered benefits that are just not given
to new companies.
MC: We feel that Dash Point really cares
about the success of our company and
offers ideas and advice that have profited our company. When you’re looking
for a factor, you need a company that’s
helpful for your particular company.
When you have the company working
as a team member and is not just after
our money, it allows you to better offer
and deliver customers the products that
they need.
IFA: How did you choose Dash Point
Financial Services?
MC: Really it feels like they chose us.
We had spoke to a few other factors
and were recommended to Jeff. Quite
frankly we were surprised to find how
great the people at Dash Point are, and
how hard they work with you to ensure
success.
IFA: What’s important to you when
selecting a factoring company?
MC: Personal service. Quick response.
Fair rates. Dash Point gives us the
feeling that they’re working for us.
They give us advice and of course the
ability to deliver to customers. Dash
Point offers customers what we can’t,
but it’s the personal touch that makes a
difference.
IFA: How has the factor assisted you?
MC: When I first started, we were
working with just cash on hand. When
you do business with schools, they’re
not like consumers, but you still have
to have the ability to float business
for 30 to 60 days. Dash Point gives us
the ability to offer a larger product
line and better delivery times to our
accounts. By helping us out, I don’t have
to worry about paying for products. And
in that sense, Dash Point has expanded
our ability to compete with other
companies.
IFA: Is the relationship a good one?
MC: An understatement. Absolutely.
Better than we could ever expect.
34 The Commercial Factor | Summer 2010
IFA: By increasing your cash flow,
are you accomplishing your goals
(growth, survival, etc)?
MC: The ability to keep going in a recession is in itself an accomplishment, and
although we are not where we would
like to be, we have outpaced our competition in terms of growth. We are truly
looking forward to the next year as all
indications show a drastic increase of
new accounts and contracts that would
have been impossible without the help
of Dash Point.
IFA: Would you recommend factoring
to other companies in your situation?
MC: I’ve had some friends that factored
as well and have had issues. Factoring
can be great for any business, especially
if it’s new or small, but if you’re not
careful, factoring can be detrimental
as it is helpful. We needed factoring in
the worst of times--economically, it was
horrifying. Everything just came at the
perfect time. If it wasn’t for Dash Point
we would be out of business. Dash Point
offered pivotal expansion and success. I
would certainly recommend Dash Point
to others.
sales and marketing
BY Thomas G. Siska
Sales Responsibility in Fraud Prevention
We’ve got trouble my friends. Yes
trouble right here in the Factoring
Industry. It’s trouble with a capital
“T” and that rhymes with “P” and that
stands for Phony. Phony invoices,
phony back-up, phony purchase orders
and phony customers. About the only
thing that’s real is the toll fraud is taking
on the industry. And it probably isn’t
going away any time soon.
But what can salespeople do about it?
They don’t decide which deals to do
and which deals to reject (of course
if they did, we’d have a completely
different article). Salespeople don’t
set the paperwork requirements, the
verification procedures or the collection policies. Nor do they handle
debtor notifications. So what can
they do about fraud? While it’s true
that the majority of the decisions lie
elsewhere, it would be irresponsible to
believe that there is absolutely nothing
a salesperson can do. It’s been written,
“It takes a village to raise a child”. The
same can be said for preventing fraud.
Sales IS the Front Line
Sales leads the charge. Therefore, they
are also the first line of defense. Proper
diligence starts when the lead is generated and should never cease until the
account is paid off in full. The very first
thing that is known about a transaction
is how did the lead arise? Did the prospect come from a “trusted source” such
as the prospect’s attorney, accountant
or banker? Or was the lead generated
in a more random fashion, say from
the internet or a broker? One source
is certainly more open to scrutiny than
the other. How a prospect was introduced to the Factor is the first piece of
critical information when embarking
down the path of due diligence.
Next is the opening conversation with
the prospect. Were they forthright
with the facts or are they possibly
trying to hide something? Was the
story consistent or did the salesperson
have to scratch their head when trying
to understand the situation? Does
the reason for the need for Factoring
“pass the sniff test”? It is important
for salespeople to communicate their
initial “gut reaction”. A bad feeling
may turn out to be nothing more than
a scared prospect feeling nervous
about their financial difficulties. But
if inconsistencies continue to pop up
throughout the due diligence process,
then the salesperson’s feelings can help
to confirm that this may be a prospect
better avoided.
If documentation is slow in
coming, there’s usually a
reason…
Time and again, prospects submit
most of the requested Application
information, but not all of it. If the
missing information was going to paint
a positive picture of the prospect, you
can be one hundred percent sure that
they would have included it. Therefore,
the only reasonable conclusion to
draw is that the missing information is
important and negative will most likely
kill the deal or at the very least, tighten
the approach to the underwriting of the
transaction. This is why Application
Packages should never be submitted
until all of the required information is
present.
As has been stated in this column on
many occasions, time is one of the
most precious commodities in sales.
If information is not forthcoming in a
timely manner, not only is it a bad sign
regarding this prospect, but now the
salesperson is removed from the market
to see potentially better deals.
The Tough Questions
Anyone can fill in the blanks or check
the box. What separates the best
from the rest is the ability to ask the
tough questions even when they aren’t
necessarily required to. Remember,
the entire process started with a
conversation with the sales department.
As transactions move through the
underwriting process, new information
comes to light, some old information
gets confirmed and finally a clearer
picture will emerge. And sometimes,
one piece of data or one answer to a
question is completely out of sorts with
the rest. Some people ignore it because
they don’t want to risk taking things off
track. And if there is a real problem, it
will be uncovered in the end anyway,
right?
Well, the best in the business accept
that risk management is everyone’s
responsibility, not just credit & operations. If something doesn’t add up, the
best thing for the Factor is to address
it head on and as quickly as possible.
For if this is the issue that kills the deal,
better it happen sooner rather than late
so everyone can focus their valuable
resources in the more productive areas.
And since closing transactions as fast
as possible is always a key to being
successful, why delay anything, especially if it is potentially critical to the
decision process? Asking all the right
questions shouldn’t be a Herculean
accomplishment, it should be the norm.
Conclusion
Margins are still tight. Risk is up.
Really good deals are less plentiful.
Therefore portfolio monitoring is more
challenging and more costly. It has
always taken a lot of invoice purchases
to make up for one dollar lost. It is
more so the case today than ever.
Everyone needs to accept more responsibility for the Factor being successful.
For when it comes to preventing fraud,
it takes a village, people. •
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.
The Commercial Factor | Summer 2010 35