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Winning Business Clients in Invoice Factoring

Winning Business Clients in Invoice Factoring - # VIII, Part 2
Advice Desk
The Surveying Process
The Due Diligence Process: Integrity is everything! In the nearly 10 years of operating our invoice factoring company, it is clear to me that this initial screening, primarily on the integrity of our prospective client is the most important

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Due Diligence that we can do. There must be in any relationship trust between all parties involved, in order for the relationship to work and blossom. This is true whether that relationship is a business one [like the one between us and our invoice discounting client], a personal one, such as a marriage or a partnership, or any team striving to reach the same goal, such as a soccer or football team. We have found that there is nearly a perfect correlation between the future probability of a problem with our accounts receivable factoring clients, and their personal credit history.

This is how we initially screen prospective clients; using a standardized scoring model for all owners actively participating in the business. This approach, while not always perfect, has been a very effective mechanism in our financial services organization.

It is important to note that this financial screening is just one of many tools in our Due Diligence process. It is important to not rely on a single tool or process in the analysis process. It is also very important to ensure that whatever tools are used are fair, objective and unbiased in structure and scope in evaluating potential invoice factoring clients.

Consider this question for a moment, if you are skeptical that this approach works. If your prospective business funding client has been unable, for whatever reason to manage his/her own personal affairs with some discipline, what will they do when they have your capital in their business? If they have a bad track record on a personal basis, why should their behavior suddenly change once they become your small business funding client? If in the past, a pattern of “avoiding problems” or denial has occurred, isn’t it logical, almost predictable, that this might/will happen again in the future relative to cash flow issues?

Again, it is important to mention that the personal credit track record of a prospect in just one in a series of variables to consider. In some cases, the unsatisfactory track record of a prospect is due to circumstances beyond their immediate control, and needs to be filtered as part of the Due Diligence process. On the other hand, this approach quickly, in my experience, weeds out the businesses, companies, and individuals that are simply out to defraud funding firms such as ours.

Establish a Written Set of Due Diligence Criteria

The important theme here is to develop a standard set of procedures to asses and get very comfortable with the integrity of your prospective cash flow funding client. We tell all prospects that we undertake a thorough background check and credit review on them and any owner of their business. Sometimes, this alone causes prospects to hang up or all of a sudden be no longer interested! Better to smoke them out before the first funding or converted check surfaces, for sure.

Not only do we tell all business finance prospects this in advance, we reinforce it in writing with all prospects, clients and various partners. For example, here is part of the actual language we use in our Expression of Interest Letter [Proposal] sent to a prospective factoring client:

“We believe that the most important ingredient of our relationship with an accounts receivables management client is the mutual confidence we have in each other. I am sure that you have heard this story, but I believe it eloquently summarizes how we feel about this. The legendary banker J.P. Morgan was once asked at a Congressional hearing how he made decisions to lend money. He was asked, "Is not commercial credit based primarily upon money or property?" "No sir" Morgan replied. "The first thing is character." "Before money or property?" the skeptical counsel asked. "Before money or property or anything else." Morgan said. "Money cannot buy it."

I recognize that there are some areas of the world that our invoice factoring client screening approach [standardized Credit Bureau data, Credit scoring, automated online background checks] may not be legal, cost effective, feasible or even available. If this the case where your firm operates and markets your services, then the need to use all other observation tools is even more important in the early screening/Due Diligence process. One needs to develop, hone and use all other avenues of information to make the cash flow funding screening process as effective as possible.

This also means that, as we discussed at the beginning of this section, the need to study and focus on the “integrity” of your prospective working capital funding client. This is often not easily done, as prior to the initial funding; a deceitful client will surely be on their best behavior. One cannot stress how careful you need to be!

Do You Really Know Your Invoice Factoring Prospect/Client?

Study how your business finance client really is, as opposed to how they appear to be. Arrive at their business an hour or two early, and see how their employees look and act. When making your on site visit, look around. As simple as it sounds, ask anyone you see how things are going. In having done probably hundreds of visits to companies, what you hear [good or bad] from the rank and file worker is usually pretty close to the truth. This might not be what you hear from the COE/CFO, who has another, less honest assessment of the situation at hand.

Finally, think about the word “integrity” in a big picture sense. Do you feel comfortable with the invoice factoring prospect? Focus not on what you see, but what you sense. Think about this definition of integrity, found online at www.wikipedia.org. “Integrity comprises the personal inner sense of "wholeness" deriving from honesty and consistent uprightness of character. The etymology of the word relates it to the Latin adjective integer (whole, complete). Evaluators, of course, usually assess integrity from some point of view, such as that of a given ethical tradition or in the context of an ethical business finance relationship. People who for instance said bad things about their own grandmother might appear to lack a form of integrity.”

The Next Article Previewed

In the next article, I will progress beyond the initial screening/Due Diligence process for accounts receivables factoring clients and present some tools to help you assess your clients’ opinion of your initial marketing efforts, including a survey we use for this effort in our firm. We will then discuss how the Internet has served as a valuable tool in the effective marketing of our business financial services to clients on a national basis.

Feel free to email me at any time with questions, observations, comments or if you need any additional information on the discussed topics. I can be reached via email at mark@ucfunding.com.