Invoice Factoring and Steps for Due Diligence

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An important part of being in the factoring business, is what is known as “due diligence.” After being approached by a prospective client, a factoring company typically undertakes a thorough due diligence program that typically takes about 24 to 48 hours.

And part of this process, is the site visit, which must be taken seriously when performing Due Diligence for invoice factoring transactions.

The site visit is an opportunity to ask questions that may not have been covered in the original telephone inquiry or application for invoice factoring and to look at the operation and determine if it is being effectively managed. It’s the perfect time and opportunity to dig deeper for information and to evaluate the character of the individual(s).

A red flag identified in initial discovery or during the site visit, needs to be considered and questions asked in order to eliminate the flag.

One example of fraud perpetrated was by the MiniScribe Corporation in the mid-to late 1980’s. MiniScribe, located in Colorado, was a manufacturer of disk drives and originally provided some of the drives to IBM for PC’s. MiniScribe’s business started to decline when IBM decided to begin manufacturing in house.

This company booked shipments as sales, recorded false shipments, re-shipped returned goods as new product, counted defective product as inventory, providing misleading financial statements and stuffing bricks into disk drive shipping boxes the bricks were approximately the same weight as disk drives at that time. The fraud was pervasive throughout the company and became increasingly more complex for a period of three years. If only the lenders, accountants and auditors had “looked under the hood,” the fraud would have been discovered much earlier. The company did not survive.

The site visit is an important part of the due diligence effort in factoring. It is essential that it be taken seriously and performed well. This is the perfect chance to discover what may not be identified during other aspects of due diligence. When funding a client on a repeat basis a periodic follow-up visit to the company are highly recommended.

Here are some of the steps that an invoice factoring company will take after a site visit to complete the due diligence efforts and move towards completion of a factoring deal.

— After receipt of the invoices – Factors usually check the credit of the debtor named on each invoice and make sure the sale represented by these invoices have been satisfactorily completed.

— Debtors’ Notification – Each debtor is notified of the purchase by the factor – once the credit has been verified, and then the client is paid for the invoices. — Debtor Payments – Toward the end of the credit period the debtor will make payment directly to the factoring company thus completing the deal.

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