12.1 Overview
ANAPLANS’ responsibilities in the factoring and PO relationship does not end with the funding of individual Schedule of Accounts. There are numerous procedures that ANAPLANS should rely upon to ensure the value of the client collateral held is and will continue to be collectable.
12.2 Nurturing the Relationship
ANAPLANS will develop working relationships with their clients. It is important that a ANAPLANS client trusts ANAPLANS enough to bring their problems to the attention of ANAPLANS.
ANAPLANS should always maintain a level of professionalism when dealing with their clients. In many ways ANAPLANS becomes a mentor to their client in regards to the financial management of their company.
If ANAPLANS is confronted with a client who does not wish to cooperate with the rules pertaining to the factoring relationship, then ANAPLANS should seriously consider whether or not to continue funding the client.
12.3 The Rules of the Relationship
Both the Client and ANAPLANS should understand that the following guidelines must apply to each relationship in order for it to be successful.
12.3.1 Client Guidelines
- Invoices and Purchase Orders listed on each Schedule of Accounts must be accompanied by shipping documentation and a purchase contract.
- Invoices should be sent in original form and one copy to ANAPLANS
- Invoices must be verifiable by a third party (either the customer or a shipper).
- Invoices sold to ANAPLANS must not be bound by any agreement which would cause nonpayment or short-payment by the customer.
- All Accounts sent to ANAPLANS by Client will be sent a Notification Letter, there is no compromise
- Clients must pay all Payroll Taxes when due and provide verifiable proof to ANAPLANS when requested.
- Clients must provide periodic reporting when requested by ANAPLANS
- Client cannot deposit any checks for invoices sold to ANAPLANS; even if the check is paying for multiple invoices, and only one invoice listed on the check has been sold to ANAPLANS.
- Client must only offer for sale to ANAPLANS invoices in which the goods have been delivered or the services provided, pro-forma invoices are not acceptable
- Client must be available to ANAPLANS at all times within reason.
12.3.2 ANAPLANS Guidelines
ANAPLANS will process the Schedule of Accounts received in a timely manner
ANAPLANS will remit available reserves to their clients in a timely manner. ANAPLANS will not with hold reserves from a client if negative collateral conditions do not exist.
ANAPLANS will require monthly reporting from client.
ANAPLANS will be courteous and professional at all times when making verification calls to the client’s customers.
12.4 Red-Flags
As business conditions are constantly changing for a client so does their level of financial stress. ANAPLANS must look beyond the procedural processes to determine if a client has reached a stage wherein the collateral base could become compromised.
In the Factoring/PO relationship, ANAPLANS must help keep the client honest in its dealings with ANAPLANS. Too often a client may view ANAPLANS as ‘an open checkbook’ which is not the case. ANAPLANS has compiled a list of red flags to take action upon should they exist in a relationship. This list has been prepared using our knowledge base of the industry and does not attempt to be the final word on problems that may occur in a client relationship.
The best indicator that a client has developed severe financial stress is if they begin to develop any activity beyond their established history. ANAPLANS should take note in how a client performs on a consistent basis and monitor the client begin to exhibit signs of unusual activity.
In most cases ANAPLANS can mitigate any harmful client activity by increasing the level and type of verification.
12.4.1 Checks Cashed by a Client
All customer checks should be sent to ANAPLANS for processing and deposit. Cashing a customer check is a serious breach of a client’s Purchase & Sale Agreement with ANAPLANS. If a payment from a customer has been deposited directly to a client’s account, ANAPLANS must:
- Call the client immediately;
- Tell the client that he or she has breached the Factoring Agreement and that such a breach will not be tolerated. The client should be told that if such a breach occurs again the factoring relationship will end;
- Advise the client that if it receives a check, it should:
- Forward the check to ANAPLANS for processing; and
- ANAPLANS will send a new Notification Letter to customer and communicate with the customer’s accounts payable department to confirm they have changed the remittance address for future payments.
If a client repeatedly cashes checks, consider terminating the contract.
ANAPLANS should also discourage clients from picking up checks directly from customers. Clients should always instruct the customer to send the check directly to ANAPLANS. For very large checks have a courier get it or pick it up if it is close to ANAPLANS. This process reinforces the concept that ANAPLANS owns the invoice payment.
12.4.2 Pre-Billing
Pre-billing may occur when a client submits an invoice to factor that has not been completed. For instance, a client has received an order to produce widgets totaling $100,000, however they lack the working capital to produce the order. The client may submit the invoice to the factor hoping that it will not be verified. Under this same scenario, the client may attempt to partially bill the customer in advance and request their customer provide a good verification to the factor when a verification attempt is made. This is known as collusion and is very hard to detect.
Another form of pre-billing is submitting an invoice to factor whose invoice date is post dated from the current date. Perhaps the client has manufactured the goods, but is unable to ship them to the customer due to a required ship date indicated on the purchase contract.
Any form of pre-billing is a serious violation of the Purchase and Sale Agreement between the client and ANAPLANS.
12.4.3 Anomalous Invoice Amounts
A client may attempt to commit fraud by sending in invoices to factor whose balances are different than their normal invoice size. For instance a client, who generally sells invoices to ANAPLANS that total $2,500 each, suddenly has invoices that are $10,000. Whether these invoices are to new or existing customers, they should be verified.
12.4.4 Payment Activity changes
When a client’s invoices begin to age longer than average (meaning they aren’t being paid in a manner that is consistent with their history) ANAPLANS should seek to find out why. This is one way to catch pre-billing. It could also mean that the quality of goods or services provided by the client has diminished.
12.4.5 Changes to the customer base
ANAPLANS should be on the alert for a customer who begins to represent a large concentration within a client’s customer base. Is this a sign of collusion?
Has the client begin selling to a large number of new customers? How were these relationships established?
12.4.6 Working Capital needs change frequently
If a client typically sends in a Schedule of Accounts on a weekly basis then begins to send them in daily, ANAPLANS should make sure they are increasing the level of verification calls to make sure nothing is being pre-billed.
Another thing to be aware of is why are the working capital needs changing, is there something that has not apparent to ANAPLANS?
ANAPLANS should also beware of clients who constantly request “over-advances”.
12.4.7 Changes in Management or Accounting Systems
Changes in key management could have a devastating effect on a client. ANAPLANS should also be aware of changes within a client’s accounting department. Has the Accounts Receivable person left, why?
Is the client unable to submit the required periodic reporting because they have changed accounting systems? What does that say about the management of the company?
12.4.8 Odd payment activity
ANAPLANS should take note of payments:
- Which are made by the client
- Which are made by an entity other than the customer invoiced
- Whose remittance advice varies from the invoice purchased (i.e., Invoice date or amounts inconsistent between check and invoice)
- Remittances that reflect credit memos not already known to the ANAPLANS
- Which are ‘on account’
12.4.9 Changes in response time
The client has always provided their monthly reporting (i.e. proof of tax payments, monthly A/P & A/R Reports) in a timely manner but suddenly does not provide the proper reporting required by ANAPLANS. While it is generally human nature to extend a deadline as a courtesy, ANAPLANS knows that it is important to their investment to have timely reporting from their clients to monitor.
ANAPLANS should be aware of the client who is always unavailable; or, a client who becomes too eager to speak with ANAPLANS. What has changed causing the client to deviate from their established history with ANAPLANS?