Factoring Concentrations – The Good And The Bad

Factoring risk concentrationRisk Management. Every factoring company in our industry knows the importance of properly evaluating their portfolios.

Whether it’s factoring, insurance, mortgages or any other type of lending, mitigating losses is vital for every company’s survival. Just a few years ago we saw firsthand how the mortgage meltdown crippled the entire global economy due to lack of controls and poor risk management.

In the factoring community the same holds true. Every factor conducts their due diligence using a specific set of guidelines that allows them to protect their security interest in the receivables of their clients while allowing enough room to generate new sales.

In many ways it is a balancing act between sales and underwriting. The sales department wants every prospect funded to prove they are bringing in the business while the underwriters prefer to turn files away to show they are watching the store.

One point of contention for many factors is how do you handle a client that becomes too large creating a concentration risk?

With most banks, the general rule of thumb is that any client over 10%-15% of the overall portfolio is considered a concentration risk. Obviously, if a concentrated client suffers a loss it will have a larger effect on the overall portfolio than a smaller client. Also, if a concentrated client ceases to do business with the factor it can have a significant impact on the company’s ability to maintain profitability.

We recently met with a very large financial institution that wanted to evaluate our company for a line of credit. When I mentioned that we had a client who was a little larger than the 10% of our overall portfolio he cautioned that their credit department would need to evaluate the risk.

This particular client has been with us several years, funded thousands of invoices with an excellent account debtor. We have a great relationship with this client and we have played a major part in his company’s growth. The banking representative’s suggestion was that we scale back with the client by either co-factoring with another colleague or to give the client entirely to another factor while taking the position as a broker on the account.

In other words, all of the goodwill that was accumulated over several years with a stellar client had no bearing in their decision. This is where I believe many of my colleagues may disagree with this stance.

I truly believe that factoring like any other business is about relationships.

Unlike most financing relationships factoring companies are constantly interacting with their clients either through advancing on invoices, rebating payments or evaluating new customers.

Almost every factor can quickly spot a great factoring client. These clients usually have strong business acumen; understand their operating margins are always available when you have questions about their account.

So I will ask my fellow colleagues in the factoring industry:

With each being equal, would you rather have several smaller new accounts or one well seasoned account?

Let’s see which camp our industry prefers.

Factoring Company Don DAmbrosioDon D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California. Don has over 25 years experience working in the commercial and residential finance industries. He previously served as Controller of a commercial insurance agency and as Chief Financial Officer of a publicly traded mortgage company. He can be reached at 949-305-9300 or don.dambrosio@oxygenfunding.com.

About Don DAmbrosio

Don D'Ambrosio assists companies with cash flow needs through invoice factoring services. You can connect with Don online through the Oxygen Funding website, LinkedIn or Google+

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