ABF Journal: Darla, please give our readers a sense of your background in the factoring industry. (i.e., years in the industry, a sense of your consulting business).
Darla Auchinachie: Believe it or not, I do not have an accounting or finance degree. As a matter of fact, when I was going back to school 18 years ago, I was working for First Capital Corp., out of Oklahoma City, which, at the time, was a very large asset-based lender. The company decided to start a factoring division. I was fortunate enough that they picked me out of the crew … and I was able to learn the business from the ground up as we grew the factoring division.
I fell in love with the business. I found that if you do factoring right, not only can it be lucrative, but you stay so much closer to your collateral — so I actually believe it’s the safest form of providing capital to small businesses that I know of. Over the years, I have worked with several large national firms, and I went into semi-retirement about a year and a half ago. When people found that out, some of them said, “We need you to come out and help us out again.” So I started consulting and it’s been a pretty good year.
What I do in the consulting world — it’s pretty much anything to do with factoring. For example, if there’s a startup company that needs guidance through the maze of everything that is factoring, I can go and help them design their company from credit criteria to picking the right legal documentation and the right attorney and helping to design an operation that fits their risk appetite and their capital structure. I go into existing factors whose investors need an independent portfolio review… It’s such a great business because factoring companies run the gamut from multi-billion dollar corporations to the guy who only has $1 million out on the street. It’s such an entrepreneurial-based business that it’s fun. Everybody’s different.
ABFJ: From your perspective as a consultant to the factoring industry, how would you assess the business climate is for factors? Are these good times with viable opportunities or are we not much farther along then we were about a year ago, with lots of prospects of lesser quality?
DA: I think that we’re better off today than this time last year. This time last year, when the banks initially tightened their credit standards, there were a lot of deals out on the street and these prospects were unable to qualify for a factoring program. Then, with the economic downturn, there have been clients whose receivables weren’t enough to generate the funds they required to operate.
As an example, when liquidity was abundant, there were many capital providers that were structuring deals that are undesirable to factoring today. They might structure a client that had a side note that was unsecured and in addition to that, they priced it aggressively low so that if that particular prospect or business lost their financing because their factor went out of business, it was very difficult to be able to structure something to replace the facility. In today’s world, we typically don’t do over-advances anymore. We need to price accordingly. For a long time, say maybe until about this summer, there were a lot of facilities that everybody was looking at that were very, very difficult to get done. And we were looking at two to three times more deals and still only closing maybe about the same rate as before.
The other problem is that organically, a lot of factoring companies saw their volume reduced because their existing client base saw their volume reduced. Factors in the transportation sector had volumes decrease by upwards of 30% simply because there wasn’t anything moving. So it’s been interesting.
And from what I’m hearing, it seems like the deals out there are getting a little bit better — it’s those companies that have been managing to survive the downturn but that are not being renewed by their banks that still have a solid operation. These are the types of businesses where factors can go in and provide the financing.
ABFJ: What’s your advise to factors in assessing risk in underwriting factoring deals today? In other words, what are the pitfalls or common mistakes you see factors making in the underwriting process?
DA: This is a good question really. I think that probably the number one common mistake that factors make is that they don’t truly understand the collateral that they’re looking at, they don’t truly understand what the business does, what triggers their billing. That is the art form of factoring.
Second to that, in today’s climate, I think it’s really important that the business that’s getting funding has some skin in the game — this is key. They need to have something that makes it a little bit harder for them to walk away. And so, prospects are finding it a little more difficult to find financing if they aren’t able to come to the table with something themselves. I think that the actual verification of the collateral prior to funding is something I’ve seen time and time again where factors have decided for whatever reason that they feel comfortable enough about a prospect so they spot verify or random verify the collateral. In the “old days,” we would verify up to 80% with a third party prior to purchasing the invoices on a new client. Over the years, where it’s been a different appetite out there, a lot of folks would just buy in a book of business without doing enough due diligence and that can really, really hurt, really, really quickly.
I think the last thing is that some factors are still taking too great of risk on the account debtor credit side. In past years, a lot of folks were able to have credit insurance, and that’s one of the first things we saw impact us in December of last year/January of this year when many of the major carriers were reducing their credit limits on account debtors. I think account debtor credit is one of the hardest things we have to deal with as factors.
ABFJ: What are some of the pitfalls or common mistakes you see factors making when it comes to portfolio management?
DA: Complacency. It happens to all of us where we’ve had that client for two years or three years, whatever — the account has always performed well so we take our eye off the ball; we lessen our verification standards, lessen our client compliance standards and that always comes back to bite us. I’ve talked to a good friend of mine out of south Florida recently and he just caught his “best client” doing pre-billing and submitting false invoices. When you have that client on the books for a long time, those are actually the ones you don’t want to become complacent on, because we just cannot lessen our operational standards in this economic climate.
And then not properly verifying is next. You see, when we relax our verification standards it always opens up the door for clients to commit fraud.
One more thing — when liquidity was abundant, some capital providers would structure clients with soft or non-notification and that doesn’t preserve their rights to payment over notice. I think many factors come and go, but the ones that make it for the long term understand how important notification is to the factoring industry. They structure most of their deals with full notification, because factoring requires it. A lot of newer factors feel feel the pressure to get deals on the books and so they’ll bring deals on that don’t fit their proper notification criteria. That’s also a recipe for disaster.
ABFJ: Having witnessed that economic turmoil we’ve experienced in the last several quarters, what would you say the “new normal” is for factors? Are there aspects of doing business as a factor that will never return?
DA: The new normal is really the old normal. I think that for decades prior to the mid 1990s, factoring was a very simple thing. We notified, we verified, we checked the credit, we provided capital. Since the mid-1990s, with all the liquidity that’s been in the market, so many new people came in and tried to put a different spin on things — like I was talking earlier with soft and non-notification, or quite frankly non-verification. People would trust that their clients were providing valid info to them and letting clients do their own collection calls, which is a tool that factors have always used to make sure that they stay close to their collateral.
What I see now, is that successful factors are going back to all of those old techniques that have always worked or never stopped doing them in the first place.
ABFJ: As you lead the Factoring 101 segment at the IFA, what’s your advise to those considering embarking on a career in factoring?
DA: First of all, I don’t know if you ever printed this in ABF Journal, but did you know that Yahoo named Factoring as one of the hottest jobs for 2009? I find that really exciting. Years before factoring just hasn’t been very sexy, I guess, because no one has ever really talked about it much. Now there is so much information available on the Internet — great blogs like www.factorguru.com.
As far as embarking on a career in factoring, I would say that it’s an exciting job because every client is unique and you get to learn more about different businesses than you would in any other job that I can imagine. Some people go to work for a company and they spend their entire professional career with say GM or something and that’s all they know is the car industry. Factoring companies are multi-faceted because for the most part.
I would say you have to be a naturally curious person to really want to be in factoring — and also a people person because you talk to so many different people, and maintain relationships that you probably wouldn’t have in any other sector.It’s one of the few industries out there that there really isn’t a school that you can attend to learn factoring. You can attend conferences and you can attend classes, but you need to be a bit of a self-starter and hopefully find the right company to go to work for that can provide good mentoring for you.
If you were going to ask me what my advice would be for those that are thinking about starting a factoring business — I think that before you actually decide to start a factoring business, you need to really understand the product and the risk involved with factoring — the product of factoring. Make sure that you have a large enough capital base yourself and access to capital because there’s a lot of people that came into this business that found out really quick in the last year that liquidity is difficult to come by. My advice? Do your homework, understand the factoring product and that you have the capital behind you to be able to get started.
Complied by Amanda L. Gutshall, associate editor