Banks lose money in factoring for four reasons, and they show up in roughly the same order every time. Invoices do not get verified, or they get verified in a way that is not verification. Payments do not reach the lockbox. The collateral trends that precede a loss go unread. And the deal gets underwritten like a credit facility instead of like collateral.
Factoring has a risky reputation inside banking and it is earned. It is just earned by the execution, not by the asset.
Here is how it usually happens. A bank decides to get into factoring. Somebody looks around the room and hands it to Johnny, because Johnny is a good banker. Johnny is a good banker. Johnny has never factored an invoice in his life, and nobody teaches him, because the assumption is that a commercial lender already knows how.
He does not. A banker monitors the metrics of a company. A factor monitors the performance of collateral. Those are different jobs with different early warning signs, and the second one has to be learned.
What Verification Actually Means
Notify. Verify. Identify. Three of our six non-negotiables, and the three where bank programs fail first.
Notification means the account debtor knows to pay the bank, in writing, before you fund. Verification means confirming the work was performed and the invoice is owed, from the debtor, not from your client’s paperwork. Identification means reading the collateral for the patterns that show up well before a charge-off. Slowing payment. Rising dilution. Concentration creeping.
Skip any one of them and the file still looks fine on the day you fund it. That is what makes this asset class unforgiving to learn on your own.
Run correctly, the numbers are not exotic. Our default rates over time run in line with what a bank already carries on its C&I book, against collateral you are watching every single day instead of financials you see once a quarter.
Our CEO spent thirteen years running factoring inside banks before he ever ran one outside of them, and grew a bank portfolio to $50 million doing it. We know what your credit committee is going to ask, because we have sat on that side of the table and answered it.
If your bank has looked at factoring and backed away from the risk, schedule a call and we will walk through how the execution actually works.