Figuring out the Finance Jargon

TDahm2

Warning! The remainder of this paragraph is not intended to make sense, but to make a finance jargonpoint. I want to touch base andempower you to buy-in to a paradigm shift that’s in the wheelhouse of our core competency. If you will drink the Kool-Aid, we can incorporate best practices and really move the needle.  This thing is scalable, but we need to make hay while the sun shines.

While the statement above used a lot of words, it didn’t say anything. The writer may have had a clear concept that may have actually been solid, but the overuse of jargon made it totally incomprehensible. I’ve been in many meetings where this occurred. The jargon threw me off and I couldn’t catch up.

Every group has its own peculiar jargon. While this helps them streamline their insider communication, it throws any outsiders off and he/she will miss (or misinterpret) the point. In the commercial finance business, a lot of terms are used and it can get very confusing – even for those of us who have been in the field for decades.

Often Used Descriptions of What We Offer:

  • Accounts Receivable Financing
  • Asset Based Lending
  • Discount Factoring
  • Traditional Factoring
  • Factoring
  • Receivables Purchase
  • Invoice Factoring
  • Working Capital Financing
  • Inventory Financing
  • Purchase Order Financing
  • Revolving Lines of Credit
  • Trade Finance

This list sounds nearly as varied as Baskin Robbins menu! Do we really provide so many different solutions? Are there differences in these offers? In short, no. The different words are used to make an impression.

Four differences Among All of these Descriptions

  1. The broadest category is factoring. Factoring is a form of financing in which the lender advances funds to a client against an invoice (account receivable) that the client assigns to the lender. That concept is captured in six of the above descriptions.
  2. There is a distinction between the factoring and traditional factoring. Traditional factoring involves providing credit protection, and is a true sale of the invoice (account receivable) from the client to the factor. The factor takes greater risk and thus provides a higher value. The term “traditional” has its origin in its use in financing trade between the U.S. colonies and England. It was used to assure the English merchants of payment for goods shipped across the Atlantic. Traditional factoring proved to be extremely profitable and thus it evolved into today’s offer which is primarily a financing tool as opposed to its broader origin.
  3. Asset-based Lending. This concept is similar to factoring in that borrowing is based upon the value of certain assets, including accounts receivable. All of the lenders will advance against accounts receivable, with many also providing funds based upon the value of inventory, equipment, and commercial real estate. Because of the constant change in the value of accounts receivable and inventory, these lenders insist upon the borrower having a robust and accurate accounting system, which the lender audits frequently. This covers at least four of the above categories.
  4. The last category is trade finance. Most people think of international trade when they hear that term, but it is also applicable to domestic trade. It is any financing that facilitates a sale, so all of the above can be categorized as trade finance. It is important to distinguish between purchase order (PO) finance and inventory finance. There is often confusion about how these offerings work. Purchase order financing is a method of credit enhancement in which the purchase order lender assures the supplier of payment. The advance is conditioned upon the supplier performance (delivery) and is based upon the ultimate sale value of the client’s purchase order. Inventory financing can be a broader form of financing where the clients’ inventory is the basis of the funds advanced, regardless of whether that inventory relates to a specific purchase order.

So, the point of this is to not let the jargon throw you off. If you are seeking financing for your own business, or on behalf of a client or friend, it is important to assess what the true financing need is. Forget about the sea of terminology. If you have a short-term transactional need, an asset-based lender is probably not the right fit. That likely falls into the factoring and trade finance category. If you are looking for an ongoing source of funding to operate your business, that is likely to fall into the asset-based lending category.

The bottom line is to describe what you need and then listen to what the lender offers. Does it provide the funds when you need them? Are the costs in alignment with your need? You don’t want to pay for a long financing commitment if you only have a temporary need.

Whatever the financing is called, it must meet your need, be simple enough to manage within your current processes, and have a cost structure that fits the duration of your need.

Author

Toby Dahm serves as senior vice president and ABL portfolio manager for Hitachi Business Finance. In this role, he assists in business development and is responsible for underwriting and managing all of asset-based loans.

Toby has more than 25 years of experience in commercial lending. He is active in the Association for Commercial Growth, the Commercial Finance Association, and serves as an advisory board member for The Salvation Army.

Contact Toby today at tdahm@hitachibusinessfinance.com or (248) 658-3208.

3 Tips for Better Document Tracking

Alan WooldridgeYour bank likely receives hundreds (or thousands) of documents each day. Customer files, invoices, contracts, and legal agreements are just a few common examples.

Unfortunately, some documents fail to arrive on time. Others never arrive at all. In an industry as compliance-focused as banking, overlooking a single document could cause serious ramifications for your institution.

How do you ensure everything is properly accounted for? Consider these three tips.

  1. Stop Relying on Manual Tracking Processes

We recently surveyed 96 community banks to learn how financial institutions manage their document exceptions. The results were astounding. According to the study, 69% of those surveyed still use some type of manual exception tracking process. Of those relying on manual processes, a majority use spreadsheets and/or core banking systems.

What’s wrong with manually tracking missing and expiring documents? Although better than nothing, spreadsheets and manual ticklers create excessive administrative burdens and are subject to human error. For example, consider a commercial loan that necessitates the annual collection of financials and insurance. As the loan’s anniversary date approaches, your staff must remember to generate notice letters. Then, if the customer ignores the letters, additional reminders must also be sent. If there is still no response, further action must be taken until the customer submits proper documentation. Even after the customer’s files are received, staff must remember to manually clear the exception in the tickler.

Now, multiply the work performed for a single loan across your entire portfolio. It’s therefore understandable why so many banks struggle to efficiently collect customer documents.

  1. Seek a More Integrated Workflow

For these reasons, some community banks are turning to a more “integrated” approach to document tracking. Rather than maintaining separate imaging archives and exception tracking databases, consolidating everything into a single document management portal can be extremely beneficial.

How so? Let’s consider the same situation, but this time imagine that your bank uses integrated document management software. Unlike a manual tickler, which relies heavily on the user to identify and resolve exceptions, an integrated system does the work for you. When a document due date approaches, users are prompted to collect the missing or expiring item(s). Notice letters are sequentially queued up, drastically reducing the amount of work for your loan administrative team. As customer documents arrive, your staff can simply scan or upload the files to the correct customer record, instantly satisfying the exception. This increases the accuracy of your exception reports, while reducing the number of steps for your team.

  1. Create Reporting Automation

Speaking of reports, you’ll also want to seek a solution that streamlines the exception reporting process. Given the nature of missing and expiring documents, it’s possible that a broad spectrum of stakeholders at your bank need this information. Lenders, loan administrators, senior management, and even auditors have varying uses for exception reports, and each group usually asks for the data at different times of the month.

When comparing software vendors, be sure to seek a system that offers exception report automation. Ask plenty of questions during the discovery phase, as to ensure that each stakeholder can receive his or her own unique log on credentials. (Some systems fail to offer a user-based approach, which makes reporting automation nearly impossible.) In addition, find out if the vendors you’re considering offer subscription-based reporting. Daily, weekly, or custom-defined reporting should be high on the list of must-have features for your bank.

Invest in Your Tracking Process

The first step toward improving your document tracking process simply involves understanding your current bottlenecks. Invest time to understand your workflow and identify opportunities for improvement. Then, once you’ve developed a solid plan, consider matching technology to your ideal process.

Remember, the ultimate goal of this initiative should be focused on two primary outcomes: reducing exceptions and improving efficiency.

Author:

Alan Wooldridge is the President of AccuSystems, LLC, a bank technology and software development firm located in Pueblo, Colorado. To learn more about AccuSystems, visit http://www.accusystem.com.

8 Things You Need to Know if You’re Thinking of Buying a Franchise – And YES Financial Services Franchises Do Exist

banfield_david_wp_sizedThe world of franchising today is incredibly diverse. It wouldn’t be an overstatement to say virtually every type of business and business model is franchised in one form or another. The financial service sector may have been a slow starter from a franchising perspective but has certainly now made up ground. Franchise opportunities exist in many diverse ‘white collar’ business environments. Below I’ve outlined some of the most important things you need to consider if you are thinking about becoming a successful franchisee.

  1. Know What it is You Want to Do

Before you go any further really consider what it is you want to do. At the end of the day, you’re buying a business and it may be worth assessing what skills you have that can be applied to being a successful business owner and your chosen franchise. Unfortunately, too many individuals often see themselves as franchisees of a particular brand because they have, in a past or present life, been doing exactly what the franchise offers.

Such people firmly believe that as a long-time professional they know all the ins and outs of the process, require minimal training and are already well on their way to instant success under a brand name. The reality invariably proves that there is always more you can learn and processes that can be improved upon.

There is a distinct benefit for professionals who are trading on past work experience when embarking on a franchise opportunity. Individuals engaged in ‘the business’ that the franchise embraces can certainly make excellent franchisees and can often quickly create a solid profitable franchise.

  1. Know They Have Proven Systems

The advantage a franchise has over starting up your own business is that it is based on a proven business model, that’s been shown to work. The most successful franchises are built on established processes. If the franchise your considering can’t demonstrate these, from payroll to marketing, then you need to tread with caution. A key question would be – just how long has the franchisor been franchising their model?

  1. Know Your Earnings Potential

Evaluating the earning potential of a franchise can be difficult, especially if it involves territorial exclusivity. Naturally you should request as much financial information as the franchisor is able to supply. In addition, ask the franchisor to introduce you to existing franchisees so that you can seek out first hand operating experience. Make sure that you talk to a cross section of franchisees, as we say the good, the bad and the ugly!

  1. Know You’ll Be Supported

Just because you are awarded a franchise it doesn’t mean you have acquired a silver bullet for success. The success of your franchise is very much in your hands, however franchisor support will be a key ingredient in your success. Therefore ensure that you understand the franchisor’s training and support system and especially their ‘after-launch’ support and mentoring programme.

At The Interface Financial Group, we place a lot of emphasis on supporting our franchisees, from extensive induction programmes to managing the due diligence process.

  1. Know They’re Here to Stay

Truth in time tells all…that’s an idiom to live and die by in franchising. A franchise that has stood the test of time, economic peaks and troughs, must be doing something right. Indeed, it speaks volumes for the processes and business models the organisation has put in place.

With so many new franchises popping up all the time, it’s hard to say how many will survive and how many will crash and burn. Check out their history.

  1. Know the True Costs of Being a Franchisee

The initial cost of setting up a franchise can be quite significant. It’s important to know just what you’re paying for and what the total start-up cost is going to be. Review the franchise agreements and watch out for hidden fees in addition to the royalty payments, such as required marketing fees or training. Also remember that budgets often take longer than expected to work, so always allow extra time and cash for the start-up period.

  1. Know What Other Franchisees Think

Ultimately when you’re buying a franchise, you’ll most likely speak to the franchise sales people and others  from the franchise’s HQ. All too often they’re focused is on getting you on board. Therefore, as suggested above, we always encourage prospective franchisees to speak to other franchisees and wherever possible to actually meet with them, especially if they have a franchise format that is open to the public. This enables a prospect to see a franchise in action – that’s one of the best information items available.

  1. Know you’re Comfortable with the Franchise’s Rules

Great franchises are built by those who can put to use their entrepreneurial flair, particularly in areas such as marketing and product/service placement, while operating within the organisation’s systems. Some franchises are very strict about just what you can and cannot do, while others are more liberal. It’s important to be sure you’re comfortable with the degree of freedom your particular franchise offers. If you are a consummate entrepreneur, franchising may not be for you as you probably like to re-invent the wheel several times each month – definitely not the franchise approach.

Author:

For the past 20+ years, David Banfield has been at the helm of The Interface Financial Group, steering it from an invoice discounting company into an international invoice discounting franchise and license operation.

Before growing Interface, Mr. Banfield was involved in many facets of the credit and banking world.  His career spanned many years in ‘offshore’ locations, working in the international trust and banking arena. His professional qualifications cover both Banking and Credit Management.

With in-depth experience gained with The Walter Heller organization, based in Chicago, he gained valuable commercial finance and factoring knowledge, which was of great value in styling the Interface franchise operation. Currently he heads up the global development work for the franchise and license program.

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Newspaper Notice ≠ Commercially Reasonable Notice

jonathanfriedmanNewspaper promotion of distressed asset sales was state-of-the-art when Ragged Dick, Tom the Bootblack, and Phil the Fiddler walked the streets of Horatio Alger’s New York City.  Times, however, have changed, as have the habits of potential purchasers and the means by which they look for their next deal.

A secured lender exercising its rights under UCC §9-610 to sell collateral after foreclosure has a duty to market the sale in a commercially reasonable manner.  How does one do that today?

A common knee-jerk is to run a newspaper ad.  This will constitute commercially reasonable notice and is likely to help achieve robust bidding, right?

No, it isn’t and it won’t.  And more and more lenders are getting sued for these misconceptions.

Looking Back

Let’s step back though time.  The total daily circulation of newspapers in the United States was about 54 million in 1950.  By 2000, the total daily circulation in 2000 declined to about 48 million, despite the U.S. population having about doubled since 1950.  And it is reasonable, to say the least, to assume that the number has dropped precipitously since, given that:

  • Wikipeda did not launch until 2001
  • LinkedIn didn’t come online until 2003
  • Facebook didn’t launch until 2004
  • Reddit was a 2005 thing
  • No one was tweeting until 2006

Changes Are Afoot

The law does not always keep pace with changing technologies.  Law makers, however, are taking note.  As early as 2012, for example, the Texas Municipal League wrote this in a legislative update:

Notice to the public is an essential part of open government, but antiquated print ads published in papers with ever-declining subscription don’t appear to be the best way to promote open government. Nevertheless, newspaper organizations are ramping up their opposition to Internet publication of notices. Why? Legal notices provide revenue in an era of declining print subscriptions.

Case Law is Evolving Too

The key standard under the UCC is the commercial reasonableness of the sale.  Courts have long held, and the commercial finance community has long relied, on the notion that the product of a commercially reasonable sale is the fair market value.” The consequences of failing to act in a commercially reasonable manner can be severe.

The UCC does not, however, define what is “commercially reasonable.”  Instead, UCC §9 -627(b)(3) states that a “disposition is made in a commercially reasonable manner if the disposition is made . . . in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.” This is a standard that all but invites litigation because of its factually intensive nature.  One thing is sure: there is already case law that instructs that newspaper notice alone does not always meet this standard.1

Author:

Jonathan P. Friedland is a partner with the law firm of Sugar Felsenthal Grais & Hammer LLP, with offices in Chicago and New York. He can be contacted at jfriedland@sfgh.com or 312.704.2770.  His full profile can be viewed here.  He does not represent lenders but a significant part of his practice is focused on representing distressed businesses and their buyers.  This article is based on a longer article available here.  He founded DailyDAC, LLC in 2005 to assist lenders in providing actual commercially reasonable notice of asset sales

[1] E.g. DiGiacomo v. Green (In re Inofin Incorporated), 512 B.R. 19, 89 (Bankr. D. Mass. 2014); Ford & Vlahos v. ITT Comm’l Fin. Corp., 8 Cal.4th 1220, 1229 (Cal. 1994); Comm’ Credit Grp, Inc. v. Barber, 682 S.E.2d 760, 767 (N.C. App.  2009).

Cybersecurity: Critical For Businesses Large And Small

VinceMancusoPhoto

A cyber-attack can damage a company’s operations more rapidly and more expensively than virtually any other crisis. Lost revenue due to downtime is one thing but compromised confidential information is much worse. The good news is that there are a handful of proven tactics entrepreneurs and small business owners can use to guard against most attacks. For firms with more sophisticated systems, several reputable cyber security firms offer competitive services and software.

An astounding 71% of all security breaches will target small business, according to a 2014-2018 forecast by the IDC research group highlighted by Small Business Computing. And Forbes recently reported that cyber-crime is projected to grow to $600 billion this year, larger than any other form of crime. “Cyber criminals find small businesses easier targets because their defenses are often not as advanced as those of larger businesses,” explained Gary S. Miliefsky, founder of SnoopWall Inc., a counter-intelligence technology company.

One growing form of cyber-attack, according to Forbes, is known as ransomware. “Hackers maliciously install a file that not only encrypts your laptop or desktop but also looks for file servers and does the same, automatically,” Miliefsky warns. “Suddenly, you no longer have access to your own files – or even worse, your customer records – until you pay the ransom.” Things are so bad, Forbes notes, that the FBI now recommends paying the extortion fees! That’s why prevention matters.

New security concerns grow amid ongoing high-profile breeches. In 2013, more than 40 million credit and debit-card records, plus 70 million customer records (including addresses and phone numbers) were stolen from Target in a security breech that cost the retailer a total of $252 million. And just this month, hackers breached hundreds of computer systems at software giant Oracle Corp, including portals for its MICROS point of sale payment systems deployed at some 200,000+ food and beverage outlets, 100,000+ retail sites, and more than 30,000 hotels.

If hackers can wreak havoc on corporations that large, imagine what they can do to a small business. A recent report found that 50% of small businesses have been breached in the past 12 months. For that reason, the following cyber security tips are recommended from Forbes:

  • If staff use their own devices to access company systems, standardize security protocols.
  • Train employees in key areas – acceptable use, password policies, and defense phishing attacks.
  • Encrypt all records and confidential data to be secure from a cyber-attack.
  • Perform frequent backups and keep a copy of recent backup data off premises.
  • Test backups by restoring your system to make sure the process works.
  • Carefully screen potential employees to reduce the risk of a malicious newcomer.
  • Defend your network behind your firewall – and make sure you can block rogue access. You don’t want the cleaning company plugging in a laptop at midnight!

Author: Vince Mancuso is executive vice president where he manages the company’s overall portfolio development strategy, focusing on asset growth, client retention, and bringing further efficiencies to the company.

Vince has over 22 years of commercial finance experience. Prior to joining Fundamental as a principal, he was senior vice president at Far West Capital and managing director of Bluewater Consulting.

Vince is a former Executive Committee Member of the Commercial Finance Association and remains active in the Association’s efforts to serve and preserve the commercial finance industry.

He is a fanatical music, sports and boating nut and resides in Austin, Texas with his wife and children.

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Tokenization of invoices: A blockchain technology supply chain finance use-case

Casey Lawlor, Fluent

Casey Lawlor, co-founder and director of marketing at Fluent

Today, one of the largest contributing factors to the cost of supply chain finance, especially internationally, is the risk associated with the multi-financing of invoices and the due diligence required to lower this risk. Blockchain has gained the spotlight of supply chain industry for a myriad of use cases, none more important than the tokenization of invoices to lower this risk of multi-financing. So how are invoices tokenized, what does tokenizing an asset do, and how is blockchain technology involved?

In a recent report, a large global bank reported $200MM in losses due to fraud from one port in China. The fraudsters simply financed the same invoices for steel many times over. The cause of this expensive oversight? The lack of transparency between and within the banks and the finance providers who all believed they had THE invoice. They had no simple way to determine if the invoices they were receiving were legitimate, unique, and had not been previously financed. Their systems were disconnected, paper-based, and required tremendous coordination to derisk these invoices. They failed to catch any inconsistencies, and they paid a hefty price. In the report, they mentioned recent experimentation with blockchain technology for just this use-case.

Blockchain technology provides a solution to both issues of transparency and the provable uniqueness of invoices. On an immutable blockchain-based network, financial institutions and financing companies can immediately query a distributed database for duplicate invoices. Companies connected can verify that invoice is legitimate, and financial institutions can be sure it has not been financed before, all without sharing the private details of the invoice.

Each invoice distributed across the network is hashed, timestamped, and given a unique identifier to prevent multiple financing on that particular invoice. Data is encrypted when passed through the hashing function eliminating the ability to read any private information. This tokenized invoice is much less risky, and can be financed at a lower discount rate. Still, if the supplier tries to sell this same invoice again through the network, that invoice will have the exact hash output and the distributed database will show a previous instance of financing to all parties.

By connecting traditionally siloed parties on a distributed database (or ledger), information about these invoices can be shared securely and verified amongst all participants – drastically reducing the opportunities for fraud. Duplicate invoices can be detected much faster and the parties responsible can be easily identified and reported to the network as malicious and untrustworthy.

This process could massively reduce fraud in supply chains and eventually lead to much lower rates of working capital down a global supply chain. While we are just beginning to understand the potential of this technology, it will be implemented in supply chains sooner than you think. There is work to be done, but blockchain will undoubtedly underpin the next leap forward in the future of trade.

Author:

Casey Lawlor is a recent graduate of Washington University in St. Louis and Co-founder of Fluent. After contributing to various technology and blockchain startups, Casey and his three co-founders started Fluent to apply a new technological solution to age-old problems in trade finance. 

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To build your career, build your own brand.

ReedHowardIt used to be that people worked for the same company their entire careers, stuck with their employer through thick and thin, then retired with a nice gold watch. That’s not the case anymore. Today, more than ever, it’s important to develop and protect your own personal brand.

Market Watch says U.S. workers had an average job tenure of 4.6 years in 2012, the last year for which figures are available. And the trend holds up within almost every industry, age, and gender category.

While I still believe in being loyal to your employer and always giving more than 100% effort, the fact is that companies can no longer afford to overlook non-performance. Why? Margins are thinner, there’s not as much profit being made overall, and companies are not making so much money they can afford to carry a workforce that’s not producing. Plus, the old 80/20 principle doesn’t apply as often anymore and you rarely see those “home-run hitters” producing 80% of a company’s results.

So how does this apply to you in 2016? It may sound selfish, but each of us should look to build our own brand, our own following, and our own network of like-minded peers. I was fortunate to learn early in my career that it’s not as important which company you work for as much as your individual reputation and how smart you work. If you develop a group of people who trust you and like to conduct business with you, success will follow. People like to do business with someone they like and can trust. 

3 keys to building your brand and your value.

  1. Continually expand your network and your database. Think “bigger is better,” engage more on social media, including LinkedIn. Make it a priority to travel outside your local city and make new contacts. As a BDO, it used to be you could make a living wooing just a handful of local referral sources but those days are long gone; you need to make it your goal to meet hundreds if not thousands of new people and target those with common interests. I know too many people who have fallen by the wayside and left the industry because their old way of doing things doesn’t work anymore.
  1. Only pursue deals you know your company will do. Know your company’s credit box and stick to it. Educate your referral sources so you’re not wasting anyone’s time. It may seem counterintuitive, but often a quick no is better than a long, drawn-out yes.
  1. Follow the Golden Rule. Sounds simple, but it doesn’t happen enough anymore. Treat others as you would want them to treat you, call people back on a timely basis, and do everything (including signing up new clients) with integrity. Make sure you do what you say you’re going to do, when you say you’re going to do it, even if it’s just sending someone a new contact’s name and number. At the end of the day, all you have in our industry is your name and if you’ve created a viable brand for yourself, there are no limits to what you can accomplish.

Author: Reed Howard, Lender Recruiting

Before founding Lender Recruiting in 2010, Reed Howard served as Chief Financial Officer for ResortVentures, LLC, an Atlanta-based real estate development company.  In this role, he was responsible for financial oversight and asset management for the ownership group of a recently opened five-star resort in Cabo San Lucas named Capella Pedregal (www.capellacabo.com).

Reed has 28 years of equipment leasing, asset-based lending and factoring experience having served in various senior level positions in sales, marketing and credit.  Prior experience includes Division President and Senior Vice President of Sales and Marketing for several business units within Textron Financial Corporation, Division President for Omni National Bank’s Factoring Division, Vice President of Business Development for Presidential Financial Corporation, Vice President of Business Development for Wells Fargo Business Credit, and Vendor Finance Group Manager for CIT.

When he is not busy serving his clients at Lender Recruiting, Reed is active in several finance associations including the Commercial Finance Association (CFA) and served as Treasurer then as President for the Atlanta Chapter of the National Funding Association (NFA) in years 2006 through 2008.

As a native of metro Atlanta, Reed is active in the local community spending as much time as possible enjoying outdoor sports with family and friends.  Reed is a graduate of Kennesaw State University, where he earned a Bachelor of Science degree in business administration.  He contributes much of his professional success to his core values of integrity and character.  Reed believes that what talent can build over a lifetime, bad character can destroy in a moment.

Which is Better: Invoice Factoring or the MCA Lenders?

Stephen Perl, PMFBankcorp.com.Headshot by www.95dollarHeadshots.com Professional On-site Executive Headshots in Los Angeles and Orange CountyInvoice factoring has been around for a long time and has proven itself to be a valuable tool to increasing cash flow for businesses, but is it limited when compared to the flexibility of the Merchant Cash Advance (MCA) lenders?

With Wells Fargo funding one of the largest players in the MCA space, Can Capital, and others popping up daily with similar services, what is one to think?

The lending space always gets creative when there is too much money on the side lines created by a generous Federal Reserve over the years and little place to employ it safely.  Foreign markets are tough and mortgages are way over done…so how do banks compete with factors when they know our product is not scalable? Simple, the banks and other lenders have created a new hybrid business loan product that blends a business credit card with hints of structure borrowed from invoice factoring companies for financing the millions of businesses they cannot reach.

So do we fear it or becoming a fan of the MCA product?

If we break down the MCA product, it cannot go very high on the dollar amount if it is to remain scalable.  We have to remember that this is a credit card with lipstick and driven by numbers and smart systems…not by lenders that manage portfolios like factoring companies or commercial lenders.

The MCA product can also sort of be annoying to businesses because the borrowers’ business accounts will be debited daily in most cases for a payoff in 6-12 months.  Therefore, principal pay back is stiff and fast.

The interest rate that Can Capital and others use is also typically around 36% when annualized, so pricing is worse than a mainstream invoice factoring company’s financing.

On the other hand, factoring is quite the opposite of an MCA loan in many respects. Its lending lines are not restricted to $200,000 typically, but rather can be in the millions.  I never thought I would say this, but, the factoring repayment is patient compared to the MCA lender. Our repayment comes when the client’s customer repays our invoice, not every day whether the invoices have been paid or not.

I think factoring companies could be a fan of MCA lenders as they are filling a working capital niche that in most cases is symbiotic to the invoice factoring company.

I would love to know what you think…comments welcomed.

 

Author: Stephen Perl, CEO

1st PMF Bancorp – invoice factoring 

Author: Secrets of Doing Business with China: Dancing with the Dragon (2012) (Amazon)

Stephen M. Perl, MS, MBA is the CEO of 1st PMF Bancorp, a leading US commercial bank lender, and the founder and CEO of ChinaMart® Los Angeles, a platform that assists Chinese companies in their investment in the USA.

CHINA ALERT: What Factoring Companies and Banks Need know About Financing in Asia

Stephen Perl, PMFBankcorp.com.Headshot by www.95dollarHeadshots.com Professional On-site Executive Headshots in Los Angeles and Orange CountyInvoice factoring companies and banks that are financing clients with ties to China should read this article.  For years, China’s economy was humming along at record GDP growth rates even when compared to similar developing countries like India.  For years, China’s GDP rates were in the 8-9% growth rate range and India’s GDP was in the 5-6% range, but over the last couple of years, the Chinese economy has precipitously fallen.

The problems in China are wide spread but the greatest problem is a government that thinks their economic decisions are better than the efficiencies found in a free market system making the decisions.  With that said, the most obvious problems facing the Chinese economy are structured over capacity, inflation, and now, negative capital outflows.

Many of these major economic issues manifest and begin at the factory level which most US banks and invoice factoring companies have exposure to.  Factoring companies that finance importers and/or exporters are exposed by the virtue of the product that is made by their Chinese supplier(s). It is difficult to find a lenders’ portfolio these days that does not have exposure to China.   Factoring companies and banks must realize that financing suppliers in China presents more risk than ever before.  If the risk is not apparent, then ask yourself if Walmart, or any other major retailer that your client has open invoice with, if these retailers will take deductions from the current a/r if their supply chain or supply of product is interrupted.  It’s a dangerous game if you do not have eyes and ears on the ground in China monitoring critical supplies for your client.  Most of the suppliers in China are going out of business because there is over capacity which has been engineered into the system by the Chinese government in order to create jobs for the last several decades.  Productivity is now becoming important in China as labor rises due to inflation.  Therefore, inflation and job loss in China are now everywhere…and potentially out of control for even the Chinese government to manage.

The Chinese factory owners are also taking measures to send capital out of the country which has been pushing down the Chinese Yuan (also known in China as the RMB).  Normally, the capital flows move to Hong Kong for safety as the Hong Kong Dollar (HKD) is pegged to the US dollar (USD); however, the capital flows are now moving quickly out of Hong Kong and Hong Kong is having a hard time maintaining its peg to the USD.  Most do not realize but Hong Kong as an equal amount of USD for every HKD.  For the first time in years, Hong Kong will now probably move its peg significantly by end of year.

For US lenders in Asia with RMB denominated loans, the deterioration of the currency may be greater than even the profit earned this year.  Unfortunately, the outflows of currency are a self-fulfilling prophecy in regards to currency depreciation, and the depreciation’s acceleration is increased by a negative feedback loop as the devaluation worsens in both China and Hong Kong.

Having an extra level of credit to review suppliers’ strength is more necessary than ever due to the many factories shutting down.  Factories are closing at record levels not seen before.  How does an invoice factoring company’s trade finance department prevent losses?  The following are suggested way to prevent losses:

  1. Visit your clients’ largest suppliers;
  2. Have mini audits of all of your clients’ major suppliers at least once a year (if not more);
  3. Use third party audit firms to check product production quality;
  4. Confirm in writing all orders and dates that the Chinese factory will be required to finish (make sure paperwork is chopped by factory to authenticate approval);
  5. Hedge RMB denominated loans if possible;
  6. Invest in an International Credit Insurance Plan while lending in Asia;
  7. Make sure to have experienced underwriters and account managers in Asia to manage daily activity (or outsource it!).

Taking a few extra precautions will make invoice factoring and related financing a lot easier.

Author:

Stephen Perl, CEO

1st PMF Bancorp – invoice factoring 

Author: Secrets of Doing Business with China: Dancing with the Dragon (2012) (Amazon)

Stephen M. Perl, MS, MBA is the CEO of 1st PMF Bancorp, a leading US commercial bank lender, and the founder and CEO of ChinaMart® Los Angeles, a platform that assists Chinese companies in their investment in the USA.

Jim Hudak, president of CIT Corporate Finance discusses how the emergence of non-bank lenders offers plenty of opportunities for traditional players.

im Hudak, president, CIT Corporate Finance

Jim Hudak, President, CIT Corporate Finance

Today, the array of lenders available to growing middle-market companies is rapidly expanding. Business development companies (BDCs) have been very active in this space of late. Such entities—which are allowed to borrow as much as they raise from shareholders—have been around since the 1940s, but the number of BDCs has grown to more than 50 in recent years. Another development has been the use of collateralized loan obligations (CLOs) by special-purpose entities to provide financing and then securitize a pool of loan assets. And, of course, hedge funds have entered the fray in search of better returns for their investors.

Let there be no mistake, in some cases, it can be difficult for a regulated entity to compete with an unregulated or lightly regulated rival for the same piece of new business. But customers don’t reward financial companies for denying the changes in the market; they reward them for seeing their way through competitive obstacles and making the adjustments needed to thrive in an evolving market environment.

At CIT, we have enlisted these new lenders as allies. It wasn’t so long ago that our company was a less-regulated lender itself. In recent years, we have adopted a more traditional banking model to gather deposits and lower our cost of capital while continuing to offer competitive financing solutions. What we have found is that working with non-bank lenders offers us a way to meet our borrowers’ needs while complying with the stricter leverage limits and additional regulations that apply to bank holding companies.

For example, the regulatory guidelines tell us that, as a bank, we generally shouldn’t extend ourselves beyond “4 x 6” leverage for senior and total debt respectively. A BDC, however, doesn’t have the same restrictions. Rather than decline to pursue such a deal, we have, in many cases, partnered with various BDCs and committed to lower “first out” leverage or provided revolvers that were senior in the capital structures. The BDC has taken the “last out” leverage. We have then carved up the deal economics that make sense for both institutions relative to our respective risk appetites and return requirements. This is essentially seamless to the customer because the company is securing a total financial package and solution.

Similarly, there are times when we rely on CLOs or other debt funds for syndication after we have underwritten a deal. These funds bring needed liquidity to the market and help to lower cost of capital to companies. Borrowers value our role in the transaction because they know we are committed to a long-term relationship and have the expertise to work with them if their financial performance deteriorates. Partnering with the CLO market and other non-bank funds is a way to manage the risk on our own balance sheet, while enabling us to support our customers’ expansion opportunities.

The value of relationship-based banking is one of the big reasons why we’re confident that the influx of non-traditional lenders will complement and not replace the traditional players in middle-market finance. In the final analysis, company leaders want to work with a lender who knows their business and has dedicated industry experts on hand. They want to know that their financial partner has worked with companies like theirs through good times as well as bad. And they want to work with lenders who have stable funding sources that won’t dry up when a downturn hits.

But, most importantly, the middle market needs financial providers who are constantly thinking creatively on customers’ behalf and are willing to go the extra step to help them grow. For us, these days, that can mean collaborating with those others might see as competitors. True to our 100-plus year heritage, we at CIT have once again found that you can get an awful lot done for your customers when you look at the market from their vantage point.

Author:

Jim Hudak is President of CIT Corporate Finance. Hudak has more than 25 years of experience in corporate and leverage banking, specifically targeting middle-market companies. To learn more about CIT, visit cit.com.