4.1 The Application
Once ANAPLANS has qualified a prospect, he or she may assist the prospect in filling out the ANAPLANS Client Application Form (CAF). By reviewing the application and gathering the supporting documentation, ANAPLANS, will determine which product should be used for the prospect.
There is no one piece of information that ANAPLANS can rely upon when reviewing the application and supporting documentation. Each item contributes to the understanding of the prospect, its business practices, industry and overall health of the company.
General
Full Corporate Name & Incorporation Date
Type of Business
Trade Names
Business Address
Phone & Fax Number
City, State, Postal Code
This information will allow ANAPLANS to determine the exact legal name of the prospect in order to provide that data to a Service Provider for a UCC/PPSA search.
Equally important in this section is the Type of Business the prospect is engaged in. ANAPLANS should know or research the industry listed to determine the risks involved with financing. For instance, is it a service business? If so, the likelihood of healthy net profits exist and the prospect will be able to afford the costs involved with factoring its receivables. On the other hand if the prospect’s industry is printing, they may have very low margins which should prompt ANAPLANS to take a hard look at the financial statements of this prospect to determine if they can afford to factor.
Bank
Bank Name, Address
Account Number
Telephone & Fax Numbers
Date Account opened
Line of Credit
Security
The Bank name and address are informational only. The Account number listed will signal to ANAPLANS where the funds they deliver will be deposited.
If the prospect has a line of credit (LOC) with their bank, they will list that information along with the type of security pledged. If the prospect has a LOC for Equipment, then the likelihood of their receivables already being pledged is low. However, they may already have a LOC for Accounts Receivable, in which case ANAPLANS will need to determine what arrangement the prospect has with their bank and work out a plan to either pay off the bank in total or have the bank subordinate their security position to ANAPLANS in order to proceed with the funding for this prospect.
Principals
Shareholder/Partner/Owner (circle which one applies)
Home Address/Telephone numbers
Own/Rent home
Title
% of ownership
S.S.N/SIN
ANAPLANS will perform a credit check on each principal of the business. The results will be reviewed by ANAPLANS to determine the integrity of the principals for this prospect.
The credit check will also provide a cursory snapshot of the assets held by the principal. If they own a home, what is the balance owed? ANAPLANS will be interested in this information to the extent that ANAPLANS will obtain a Personal Guarantee from each principal.
Receivables
What is the purpose of the funds to be generated?
Present amount of Receivables
Terms of Sales
Number of Customers
Average Monthly Sales
Are receivables pledged as collateral? (Yes or No is circled)
If YES, to who are they pledged?
ANAPLANS will review the purpose of the funds to be generated. Will the funds be used to purchase more equipment or inventory? Will the funds be used to add staff? Will the funds be used for the main principal’s personal use? Why does ANAPLANS care? Because ANAPLANS prefers that the funds will go back into the business to further the company.
What is the average Number of Customers that the prospect sells to? This helps the ANAPLANS determine if it will be cost effective to service the prospects needs. To determine if you can service the client on a cost effective basis, you need to know the prospects average number of Customer’s.
For instance, if the average monthly sales of a client is $200,000 and the number of customers is 100, then the assumption can be made that the average invoice size for this prospect is $2,000. On the other hand, using the same monthly sales with the number of customers at 2000, then the average invoice size may be only $100.
Other
Attorney/Firm/Phone #
Accountant/Firm/Phone #
Insurance Agent/Firm/Phone #
This information may not be necessary for underwriting, but will be useful for future portfolio management. ANAPLANS may want to monitor the insurance agent to make sure their client has some type of coverage.
The Attorney’s name is for information only. However in certain cases ANAPLANS may contact the attorney to inquire if any lawsuits are currently pending.
The Accountant’s name and firm number should be referenced to any audited or compiled financial statements that the prospect has included as supporting documentation.
ANAPLANS should always consider the following questions:
Is the accounting firm well-known?
Placing reliance on the certified statements provided by an accounting firm should be considered carefully.
Is the relationship independent? Beware of certified statements from a friend or relative of the client. Be aware of accountants who appear to be acting as CFOs or management consultants.
ANAPLANS may contact the Insurance Firm of record to ascertain the limits of coverage and whether or not the coverage is up to date. ANAPLANS may also ask to be named a loss payee on insurance policies held by the prospect.
Supplier Information
Principal Supplier/Product Supplied/Phone & Fax #’s
ANAPLANS may contact the suppliers to research the relationship between prospect and suppliers. ANAPLANS will also compare this information to the Accounts Payable aging supplied by the prospect with the supporting documentation to this application.
ANAPLANS may also view the suppliers as contacts to prospect with.
Client Signature
This document must be signed and dated. By signing this document the prospect has given ANAPLANS permission to use the supplied information for conducting credit checks. It is also a declaration that the information supplied is true and correct to the best of the signor’s knowledge.
4.2 The Supporting Documentation
4.2.1 Articles of Incorporation
ANAPLANS will review the documents to determine the LEGAL NAME of the prospect. Oftentimes the prospect will mistakenly list a different name on the application. This is typically an accident on the prospects behalf. ANAPLANS must be certain that the name provided is exact in order to get the proper results of a UCC/PPSA search. For instance, the applicant may list their corporate name as “ABC Supplies, Inc.” when in fact the Articles of Incorporation list their name as “ABC Supplies Corporation”.
It is equally important to use the exact registered name of the prospect when preparing the legal documents to enter into the factoring relationship with this prospect.
4.2.2 Accounts Receivable Aging and customer list with complete addresses.
These are the most important documents to obtain for your due diligence. ANAPLANS will review the A/R Aging to determine whether or not the prospect is eligible for factoring.
The customer list with complete addresses will assist the Insurance Provider in setting credit limits,
The due diligence at this stage is a review of the accounts listed on the aging.
4.2.3 Aging Categories
A typical A/R aging will list amounts due under various aging categories. Generally aging categories are: 0-30 days old; 31-60 days old; 61-90 days old and Over 90 days old.
Considering the prospect that has on average $200,000 per month in sales, a desirable aging would appear as:
| 0-30 | 31-60 | 61-90 | Over 90 |
| $174,000 | $150,000 | $65,000 | $1,000 |
This shows that the invoices are turning over (being paid) and there is a small balance over 90 days (which is expected if invoices have Net 30 day terms).
This is not to say that it is an unacceptable aging if there are balances over 90 days old. ANAPLANS should review more closely any accounts that fall into that category and ask the question why?
It is important to note here that each prospect will have a different way of producing their Accounts Receivable Aging. This report may be produced by aging the invoices listed in invoice date order, or due date order. There are several other ways various computer programs can ‘age’ Accounts Receivable. ANAPLANS should request that the prospect provide an Invoice Date aging to give an accurate snapshot of the age of the invoices listed.
4.2.4 Average Outstanding
Does the amount reflected on the aging closely correspond with the amount listed on the application? If there is a major difference, ANAPLANS should ask the prospect why.
4.2.5 Concentrations
Prospects that have a large number of customers are desirable to factor because the collection risk is spread amongst a large base. Likewise prospects who sell to a minimal number of customers represent a high degree of risk.
A prospect’s business could suffer greatly if they have a large portion of their sales with a single customer and they were to lose customer due to the customer’s insolvency or due to a competitor taking the business.
ANAPLANS requires Credit Insurance on all accounts which mitigate most risks involved with concentrations.
4.2.6 Consumer Based & Employee Receivables
ANAPLANS should not purchase any invoices which are not the result of a business transaction between a commercial entity and their client. In other words, consumer based receivables are not eligible to factor.
Some companies may offer generous discounts to their employees for products manufactured. As such, these sales fall under a consumer transaction and the customer is affiliated with the client. ANAPLANS cannot consider these invoices for purchase as payment could ultimately be compromised.
4.2.7 Credit Quality of Accounts
Maximum customer credit limits are established for each client by the Insurance Provider using its expertise. This limit is primarily based on the client’s overall outstanding, but may vary due to additional risk factors.
ANAPLANS believes it is prudent to rely upon the Insurance Provider’s established credit limit and as such not purchase invoices that will cause the customer’s balance to exceed said credit limit. However, ANAPLANS has the discretion to purchase invoices up to 10% over a customer’s credit limit. ANAPLANS will notify Insurance Provider if a customer’s credit limit should be increased.
4.2.8 Cross-Aging
If any customer has a balance due over 90 days, the remaining current balance should be verified as collectable. Why have the invoices aged so far past due? Is it a sign of product or service deterioration or could the customer be experiencing cash flow problems themselves?
4.2.9 Debit Memos
Usually a debit memo is listed on an A/R aging signifying items that are in dispute by the customer. Or, in any event a debit memo is typically produced outside of the normal invoicing process and therefore ANAPLANS would not accept this as bona-fide collateral.
4.2.10 Finance Charges
Even though many businesses place a finance charge notice on their invoices, rarely if ever are those charges paid. ANAPLANS may be able to determine if the prospect lists these finance charges on their aging as they typically will appear as small charges dated either on the first or last day of a given month and the invoice number may read ‘FC0105’.
4.2.11 US Government Receivables
An Assignment of Claims form must be completed before funding a US Government Receivable. The Assignment of Claims Act has several requirements:
Under the ACT, a contractor (ANAPLANS’s client) may assign monies due or to become due under a contract if all the following conditions are met:
(a) The contract specifies payments aggregating $1,000 or more.
(b) The assignment is made to a bank, trust company, or other financing institution, including any Federal lending agency.
(c) The contract does not prohibit the assignment.
(d) Unless otherwise expressly permitted in the contract, the assignment-
- Covers all unpaid amounts payable under the contract;
- Is made only to one party, except that any assignment may be made to one party as agent or trustee for two or more parties participating in the financing of the contract; and
- Is not subject to further assignment.
(e) The assignee sends a written notice of assignment together with a true copy of the assignment instrument to the-
- Contracting officer or the agency head;
- Surety on any bond applicable to the contract; and
- Disbursing officer designated in the contract to make payment.
There are some US Government Accounts that cannot be assigned under the ACT. These include receivables related to the gathering of intelligence, anti-terrorism, and any other classified items pertaining to national security.
ANAPLANS will complete Government Form (Govt NOA) that needs to be executed in order to file the claim with the United States Government under the ACT. The form must be signed by the contracting officer in each case.
You may find that your prospect will not understand if they are truly dealing with a government entity. If an invoice lists the customer as “Tinker AFB” and the product delivered is an insignia or patch, then the goods may be delivered to the Army/Air Force Exchange store which is a publicly held company, not a government entity. Therefore the ACT would not apply. Have the prospect furnish a check copy for a previous payment made on an invoice to their customer. If the check is drawn on an account held by a private company, it likely doesn’t fall under the ACT.
4.2.12 Offset Rights
ANAPLANS may not be able to determine from an aging any offset rights a customer may have against the invoices they have due to the prospect. ANAPLANS should attempt to review any purchase orders or contracts prospect has with customers to determine if the following exist:
- Shelf Space Considerations
- Co-Op Advertising Allowances
- Volume Rebates
- New Store Allowances
- Packaging and/or Delivery Offsets
- Price Guarantee
4.2.13 Retention
Any time retention appears on an invoice, ANAPLANS should not purchase the portion of the invoice represented as retention. For instance, a prospect who paints water towers. This is not considered construction or progressive in nature as the prospect has been contracted to paint single towers at a time. However, the customer wishes to hold back 10% of the payment until they have had a chance to thoroughly inspect the project. ANAPLANS would be able to purchase that receivable less the retention listed on the invoice.
4.2.14 List of orders on hand
ANAPLANS will review this list to see that the prospect is a going concern and to forward the data to the Insurance Provider to insure that any new customers are credit worthy enough to factor.
4.2.15 Aged Accounts Payable list and proof of payment of payroll taxes
The Aged Accounts Payable list is a valuable underwriting tool. ANAPLANS will compare on this aging the balances due to the top three suppliers the prospect included on the application. How much is due? How far past due are the accounts?
Has the prospect financial position deteriorated to the point that their accounts are in jeopardy to their suppliers? Will the dollars provided in factoring help to mend any damaged relationships?
Are there any Contra Accounts? A Contra Account is an entity that both buys from and sells to the Client. If a contra account exists, ANAPLANS should not consider invoices to the contra account as eligible for purchase. The payment of the invoices to the factor could be compromised. A contra account may only be considered as eligible when an estoppel letter exists between all parties.
Are all Payroll Taxes up to date? If not, why and what is the prospects plan to get caught up? ANAPLANS should be concerned as the IRS/CRA, for payroll taxes only (and GST in Canada), can supersede ANAPLANS’s security position against the client’s receivables.
4.2.16 Financial Statements, interim and year-end.
A review of prospects Financial Statements is the best way to learn how well they have performed in the past, and how well they should perform in the future. While ANAPLANS is looking to be repaid from advances made to a client from their customers, the overall health of the client should not be ignored.
In the event that the prospect does not have the sophistication to generate financial statements, tax returns can be used instead.
If the prospect has engaged an accounting firm to prepare their year-end statements, ANAPLANS should expect to see one of the following types of statements:
Compiled Financial Statements
An accounting firm merely compiles data received by the prospect into a financial statement format.
Reviewed Financial Statements
An accounting firm has performed a limited scope review of the data used to compile the financial statements according to Generally Accepted Accounting Principles (“GAAP”)
A CPA/CA firm will issue notes to the financial statements when there is information that bears explanation in the statements. ANAPLANS should always review the notes to financial statements.
Audited Financial Statements
An accounting firm has performed substantial testing on the data used to compile these statements. In other words, reliance can be made from an outside source as to the reliability of this type of statement. While it would be most beneficial for ANAPLANS to require audited financial statements from our clients, it is an expensive option many small businesses simply cannot afford.
If the prospect has had an outside firm prepare their financial statements, they will likely have been given a Management Letter by the firm who prepared their statements. ANAPLANS should ask the prospect for a copy of this letter. It will contain suggestions regarding the internal controls of the prospect.
Similar to Reviewed Financial Statements a CPA/CA firm will issue notes to the financial statements when there is information that bears explanation in the statements. ANAPLANS should always review the notes to financial statements.
The Balance Sheet
A detailed Balance Sheet contains items such as assets and liabilities, ANAPLANS should note the existence of the following:
Assets
Bank Accounts: How many exist? Are there multiple accounts? Does the company have a separate payroll account?
Receivables: Does the figure tie to the receivables aging generated on the same date?
Inventory: What is the value? (inventory can be viewed as secondary collateral).
Notes Receivable: Should they be included as an equity item? Are any notes payable the result of an amount due from an existing customer?
Due from Officers and Employees: Is this really collectible? If so, how?
Due from Affiliates or Related Businesses: Should they be included as an equity item?
Property and Equipment: Are theses assets that can be considered as secondary collateral or are they already encumbered?
Intangibles: Typically these have little or no tangible value and should be excluded from review.
Liabilities
Accounts Payable: Does the figure tie to the payables aging generated on the same date?
Other/Current Liabilities: What other liabilities exist? Why?
Due to Shareholder: Do they exist? If so may be necessary to get subordination agreement signed.
Notes Payable: What are they? Does a senior secured party exist against the assets of the prospect? Can the prospect service the debt?
Income Statement
The Income Statement, also known as a Profit & Loss Statement or P & L contains items such as sales and cost of goods sold which total the Gross Profit of the company. There is also listed General, Selling and Administrative Expenses which netted from the Gross Profit determines the prospect’s Net Profit. ANAPLANS should note the existence of the following:
Sales: What is the breakdown of this item?
Cost of Good Sold: What is the breakdown of this item?
Gross Margin: Is this expressed as a percentage? Is it a positive number?
Other Income / Expenses: Identify what these are.
Ratio Analysis
Reviewing the above items will allow ANAPLANS to determine whether or not the prospect is a desirable client. A quick ratio analysis can be used to determine if this relationship should progress.
Liquidity
The ability of company to meet its current obligations
Working Capital Ratio
Current Assets minus Current Liabilities
Current Ratio
Current Assets/Current Liabilities
Leverage
The degree to which a company may be adequately or under capitalized.
Measures how much debt is used to finance a company.
Tangible Net Worth
Total Equity plus subordinated debt less intangibles and due from related parties
Debt to Net Worth
Total Liabilities less subordinated debt/tangible net worth
Receivable Activity
Measures how effectively a company collects receivables and pays its bills
Days receivable = (trade A/R/revenues) x 365
Days Payables = (trade payables/cost of goods sold) X 365
Profitability
Measures the degree to which a company is profitable and creates a positive or negative cash flow
Gross Margin
Gross Profit/Revenues
Profit Margin
Net Income/Revenues
ANAPLANS should compare balances from previous periods when reviewing for a historical review.
4.2.17 Copy of Company invoices and letterhead
ANAPLANS will review the invoice for any item that may be listed that will affect the payment of each invoice. This may sound absurd, but after you have spent all the time thus far with your due diligence a prospect may provide you with copies of invoices that clearly state ‘Pro-Forma’ invoice. A Pro-Forma invoice is not an invoice for goods delivered or services rendered, it is an invoice for goods to be shipped or to be delivered.
Another thing to note, is the name on the invoice the exact legal name, or registered trade name of the prospect? If not, then ask why?
The copy of letterhead will be retained by the ANAPLANS. Is the name on the letterhead the exact legal name, or registered trade name of the prospect? If not, then ask why?
4.2.18 Brochure of company’s products
ANAPLANS will review the prospect’s brochure to show background and target audience. This may also help the ANAPLANS to understand the prospect’s industry.
4.2.19 Resume of Company’s principals
ANAPLANS will want to review these résumé’s to determine the integrity of the principals and to know more about their background. Have the principal’s been engaged in the industry for any length of time? Are they new to the industry? If so, how will their past roles benefit them in this company?
4.2.20 Personal Financial Statements of Shareholders and/or Guarantors
ANAPLANS may need to rely upon the personal guaranty of the principals of this prospect. A Personal Financial statement will reflect the assets and liabilities of each Guarantor.