With the economic downturn causing decreased liquidity, many companies are turning to accounts receivable factoring to bolster their working capital positions to get through the hard times.  It is obviously much harder to get working capital lines from banks since the credit markets are still basically frozen.  This scenario has provided factors with an abundance of opportunities for new business development.   But those that don't pay close attention to collection trends of both existing and potential hew clieht's customers could easily be gone in a short time. 

In the Winter, 2009 edition of :"The Commercial Factor", several factoring company executives were asked about their changing portfolio and underwriting policies.  Scott Griest, CEO of American Finance Solutions says "we have seen collection days increase for certain categories such as retailers and anyone selling big ticket items.   Retailers in general are taking longer to collect".  He went on to say that the travel industry (hotels, motels, car rental companies, etc.) high-end retailers, and boutiques continue to show the most collection stress"   Companies supplying automotive manufacturers are also seen as risks by factoring companies.  These are just a few of the industries that cause factoring companies to be wary. 

How are factoring companies dealing with the increased risk?

With the economy in such a volatile state, factoring companies are taking steps to keep from incurring losses.  Jack Roper, Chief Credit Officer of Crestmark Bank, states "we expect to see negative trends during 2009, but have mitigated our risk by taking additional collateral".  This is certainly an unusual step for unusual times, as normally one of the advantages of invoice factoring is the client only needs to pledge their receivables.  Other factoring companies are rearranging their portfolios by eliminating more risky clients.  For example, Capital Funds did a debtor review in the fourth quarter of 2008 and developed an exit strategy to divorce themselves from clients who "showed increasingly negative trends with no end in sight."  Jim Rothman, President of the company,  says "while we have seen good deal flow,  we have to look at twice as many deals to book the same volume of new business we did in the past". 

What can a factoring client do to become qualified or to  maintain a factoring relationship these days?

Clearly, if you own a company that is having trouble getting paid in a timely manner by many of your customers, it will be difficult to factor invoices.  Also, if you're in an industry that is in decline and you have few customers (known in the factoring world as concentration), that is also a problem for factors.   Some suggestions for dealing with these issues:

• Review your receivables aging report on a weekly basis at the least.  Don't be shy about calling those customers who are late in paying you.
• Screen your new customers carefully.  If you're already working with a factoring company, they will do this for you.
• If you have only a few customers that make up a large majority of your sales, ramp up your sales efforts to establish new customers.  Obviously this should be done whether you factor or not.