April 19, 2010
RE: Arrow Trucking, Factoring Legacies, April 2010 Edition
The funding arrangement between Arrow Trucking and its lender, Transportation Alliance Bank, was not a “factoring” agreement. It appears to be a non-notification accounts receivable financing loan, subject to all the advantages and pitfalls of such financing.
Factoring is the purchase/sale of a receivable to a factor for a discount and reserve, and the notification of said to the debtor account to pay the factor. The factors takes the risk of collection, not the seller. Check the definition of “factor” on Wikipedia, it explains it very well.
Had the lender “factored the invoices,” the fraud would have been caught early with minimum losses.
This lender wanted the advantages of high fees that factoring can provide and with the recourse and interest on loans that revolving accounts receivable financing earn. His greed and lack of proper loan supervision allowed the borrower to construct the fraud.
I would also venture that the four “factors” you highlight in your article: “What Defines a Legacy,” also lend rather than purchase without recourse receivables.
My background follows that after working for several Los Angeles banks in the early 1960s, and then with James Talcott and Walter E. Heller — true factors — I started my own company, Commonwealth Financial Corporation in Oakland CA in 1970 with little money. I then built it and sold it to an insurance company, and then grew it to $250 million with five national offices. I retired in 1988, and was then chairman of the Commercial Finance Association.
Bottom line: It is when you cross the disciplines of factoring with non-notification accounts receivable financing that you get into trouble. Be an old line factor and/or a receivable lender. Never marry the two together. Notification is the key discipline.
In my opinion, the lender deserves the whip assing (sic) he got because he never notified the accounts to pay him directly — so do the other lenders that participated in the loan. Change the rules and pay the consequences.
William F. Plein,
Past Chairman, Commercial Finance Association
As ABF Journal readers may have noticed, I never miss a chance to quote Macbeth, who when hailed as the Thane of Cawdor, asks Angus and Ross, “Why do you dress me in borrowed robes?” When it comes to tragic losses such as those suffered in Arrow Trucking Co., true factors can take comfort while lenders dressed in a factor’s “borrowed robes” should — as our reader warns — take heed. As always, we welcome readers’ comments.