First, when I say “in today’s factoring environment,” I’m referring to entrepreneurial finance –- not the traditional factoring space dominated by the CIT’s of the world that are priced at LIBOR plus whatever, where credit risk is assumed. Most factors don’t even know what LIBOR stands for. Yet they would consider pricing their relationships this way if they could implement some form of “LIBOR cubed,” if you get my drift.
Secondly, I’m referring to those who work with companies with financing needs of $5 million or less and that are not private equity-sponsored, not VC-backed and not publicly held. They are owned and run by the founders, and most of the time, these relationships are 100% company and personally guaranteed by same. There is someone on the other side of the table who has put 100% of their blood, sweat and tears into the growth and expansion of the business.
Now that I’ve laid the foundation, here are three main components winners follow to succeed in today’s factoring environment.
A Good Factoring Relationship is NOT About Price
Yes, most factoring companies spend the majority of their time discussing price and leading with conversations about who is the cheapest. Frankly, those implementing this practice are missing the point of what we do for a living. People make purchases for emotional reasons, not intellectual reasons. When we’re asked about the differences in price, we ask back, “Would you rather buy your groceries at Whole Foods or Walmart?”
The core purpose of firms like ours is to help unleash potential for our clients. We focus all of our efforts on helping our clients get what they want and to become more successful on their terms. When you can become a trusted advisor to your client, do you think they will argue over a couple of basis points? Developing this relationship takes extra effort. It costs a lot of money and time to have a formalized plan of interviewing clients and an intentional approach to client management, once a client has come on board.
This is not to say that you can’t have a “cookie cutter” shop that handles each client the same way with low-level processors. Going with the low-cost provider model is one way to approach the market. However in our experience, clients of those organizations are continuously reaching out to work with us instead. This is partly why our pipeline is constantly full. As Kip Tindell, CEO of The Container Store, says, “Fill the other guy’s basket to the brim and making money becomes an easy proposition.”
A Fraud is a Fraud...
Focus your company on what you want out of a relationship, not this idea that you’re going to get screwed all the time. General comments heard at various conference boondoggles are, “They all lie,” and “There is fraud in your portfolio, you just don’t know it!” It is a pervasive theme that all clients will eventually try to defraud you.
While this may be the most colorful and gossipy topic to cover at conferences and panels, the straight facts and our experience doesn’t support this notion. According to the most recent study by the International Factoring Association (IFA), of the actual losses sustained by the factors surveyed, 22% of the median (.9%) of NFE lost was due to fraud. And I bet that if you drilled that down, most of that was someone who was “situationally” dishonest, rather than a true “flim-flam man.”
Interesting side note –- when broken down by region, fraud losses were almost double (39%) in the Northeast. We knew there was a reason why my company didn’t win many deals in New Jersey, but I digress.
Back to my original point ... if you are doing a good job of understanding what is going on with your client and properly monitoring your client’s financial condition, you will know who, where and when to focus your mitigation efforts on. If you audit our shop, you will see vigorous compliance and stated policies, which includes 100% of verification of invoices pre-funding in some client grades. I’m not saying that you shouldn’t focus on loss mitigation, because you should. For years, we have sold verification –- especially where a concentration exists –- as a quality assurance tool for our client’s benefit. We see it as a way to add value to our client’s business and so does the client. In other words, if you want a green lawn, focus on growing healthy grass, not on the weeds.
Culture Trumps Policy Every Time
If you don’t express the exact way you want your team and clients to be treated (think mission, vision, values, purpose) and have a plan to execute that, people will come up with their own program, and the result is a very scattered approach across every aspect of your business.
For example in a factoring relationship, the ability that you have in any agreement to enforce your rights is very far-reaching. In the most egregious of circumstances, there may be a time for enforcing your rights to the fullest extent of a contract. However in our shop, the rule of thumb is if we have to start saying to our clients “per this policy and per that policy," we have failed and have lost the spirit of why we got into business with the client in the first place.
Recognize that the way your team relates to one another is the way your team will relate to your clients. The most important core value that our company has is team. We know that, if we honor and support the goals of our team members that spirit will flow through to our client-base. A company that we admire greatly for taking care of their team first is Southwest Airlines. Think about how you feel when you get on one of their flights versus American Airlines or one of the other unionized airlines. We look for the same things in our team members as they do –- a warrior’s spirit, a fun-loving attitude and a servant’s heart. A guy who knows a little something about building a team, Phil Jackson, said it best, “Love is the force that ignites the spirit and binds teams together.” Find a way to inject that love into everything do and things work out.