Accounts-receivable secured lending: looking over your shoulder

RMA Journal, The, July-August, 2004 by Mark Zoeller

Federal law also trumps the UCC in lending against federal contracts and Medicare and Medicaid A/R.

Factoring

Some banks have purchased a factoring (buying A/R, with recourse to the client) program from a vendor, which has become one of their product lines. In factoring, the borrower is called the client. Through the years, I have come across a couple of situations that banks should think about.

This product is credit. Should an A/R debtor not pay on a large amount of invoices, the client has to bc able to buy back the invoices. One bank did not realize this until it had an overloan on its hands. The paperwork and constant communication significantly diluted the product's profits at this same bank.

If your bank buys credit insurance, read the policy. Another bank I reviewed purchased credit insurance and presumed that it had no risk. Credit insurance mitigates but does not eliminate all risk. When the bank had a fraud loss, the loan officer finally read the policy only to find, belatedly, that it included a large co-pay (the policy paid 50% of the first $50M of loss) and that the insurance on each A/R debtor had a limit determined by the debtor's Dun & Bradstreet rating. These variable limits require additional monitoring.

The End

Yes, doing it right requires time, effort, and expense. But banks that do it right have found that assessing the risk, managing the risk, and maximizing the return/risk ratio are well worth it. Other banks, though, need to bridge the gap between what their practices are and what their practices could and should be. Perhaps this article can help them do that.

Contact Zoeller by e-mail at MarkZoe@aol.com

[c] 2004 by RMA. Mark Zoeller has worked as a credit analyst, loan officer, and departmental and regional credit administrator at a large regional bank; as a loan collection officer at a smaller regional bank; and as an examiner with the OCC. He is now a banking consultant with community banks, mostly in the San Francisco area.