Every business that extends credit to its clients understands the importance of due diligence. Just as most people would not blindly hand over a stack of cash to a stranger on the street, factoring companies do not begin purchasing invoices from clients whose businesses they do not understand.
Once the client relationship is established, it is easy to become comfortable with the routine of purchases and collections and ignore due diligence entirely. This complacence can prove disastrous for the client relationship. Tax issues, debtor concerns, and client malfeasance can all fly under the radar until the situation requires a more serious (often legal) response.
Fortunately for factors, a variety of services exist to make the process fast and easy. Perform the following due diligence on an ongoing basis to identify potential issues before they reach a critical point.
1. Check the business name
Every few months, run your clients’ company names through their state’s Secretary of State business entity search to ensure they are still active and in good standing. This also keeps you informed about fictitious name filings that may suggest a client is planning to close or restructure their business. If a client mentions a plan to do business under a new name, run a search on that business name as soon as possible. You may need to prepare new legal documents if clients plan to factor under a new business name.
2. Keep tabs on contacts
Company owners’ personal financial or legal issues can spell trouble for the business, especially if your client is a sole proprietor. Periodic background checks can highlight these types of issues and prepare you in the event that you need to change or end the factoring relationship.
3. Identify tax issues
Even with a signed 8821, tax issues often emerge quickly and a notice of pending action may arrive too late. Tax issues have dire consequences for a factor, as an IRS lien takes first position unless they choose to subordinate. Tax Guard is one service factors can use to stay ahead of tax problems. Subscribers create their 8821s through Tax Guard and upload signed copies. Tax Guard then performs initial reporting and adds your clients to a monthly reporting system that lists all deposits, returns filed, and outstanding balances, as well as the client’s status with the IRS. They will notify you of any intent to levy, liens filed, or delinquent accounts, and they will work directly with your clients to establish Installment Agreements or IRS subordination so your interests are protected.
4. Find additional liens
An additional UCC filing may indicate that your client is planning to leave your company, or it may uncover a situation in which they have double-pledged their receivables to another company. In either case, make a practice of checking your clients for new liens annually – doing so when you renew your own company’s filing will save time and serve as a helpful reminder.
5. Don’t forget account debtors
Even the best factoring relationship can turn sour if account debtors start paying late, making incomplete payments, or missing payments entirely. Backed up collections are frustrating for everyone involved – the factor, who must then chase payments, and the client, who may be unable to factor new invoices or may have to buy back invoices that go above recourse. Sign up for a service like Cortera to keep track of payment trends and credit issues with your current and potential debtors. Cortera relies on subscriber reporting, so upload your own A/R to their database for improved results.
Every good relationship requires legwork and an occasional pulse check. Adding routine due diligence to normal client maintenance procedures can keep factoring relationships strong and healthy, and helps factors solve most problems before they start.
Philip Cohen is the founder and president of PRN Funding, LLC, which is an extraordinarily focused niche factor in the healthcare funding market place.
Visit the PRN Funding website at www.prnfunding.com for more factoring and brokering information.