Reducing Outstanding Balances

Is there a way to have complete, accurate, and timely access to factor accounts receivable information? The answer is a qualified yes. The best arrangement for securing access to this information is a receivables purchasing program, in which the bank purchases the business' receivables on an ongoing basis. Receivables purchasing program requires specialized software for processing accounts, and this software should give the bank fingertip access to invoice detail, outstanding balances, terms, and other key information in its own PC-based system.

One software program can produce more than 50 detailed reports to organize this critical information. Banks using such a system can significantly enhance their risk control by having more and better information available for analysis at any time.

Control of the Cash A primary risk in most traditional lines of credit secured by receivables is that the account debtor will pay the business, but the proceeds of those payments may not be used to pay down the line. If the business experiences difficulty and is unable to generate sufficient new receivables, the bank is exposed. In the vast majority of traditional "secured" lines, the bank does not control the cash. In effect, the bank allows diversion of funds to take place as a matter of routine. Time and again, the bank that does not control the cash encounters borrowers that fail to meet their line cleanup obligation or end up with an evergreen portion to their line, for which there may or may not be an adequate source of repayment.

A lender can mitigate this risk by requiring that payments from account debtors flow directly to a bank lockbox and by stressing in documentation that any remittances received by the business are to be forwarded immediately to the bank. Receivables purchasing facilities and revolving credits handled by bank asset-based lending departments are almost always structured in this manner.

Bank exposure to this risk lies primarily in unmonitored or loosely monitored lines of credit. The presence of a security interest in receivables may, in the absence of a lockbox structure, give the bank a false sense of security and control. Controlling the cash, applying it to reduce outstanding balances, and requiring the business to generate new receivables before the bank advances additional funds are crucial to maintaining a risk-controlled, self-liquidating facility.

Effective Monitoring Procedures Because receivables are the fastest moving non cash asset a business has, effective and consistent monitoring is the backbone of any credit facility based on accounts receivable. Monitoring should be a state of mind, and an effective monitoring effort should aim to create top-of-mind watchfulness for unusual activity in the receivables as well as procedures in place for documenting and reporting such activity.

This effort actually begins at the time of initial underwriting when determining any special risks associated with the receivables, such as the offering of dated terms, the presence of special return privileges, and the existence of concentrations. Every lender is familiar with receivables as a balance sheet item, but many do not take the time to understand the nuances of the selling process by which a specific business receivables are created. Identifying such characteristics and determining how they will be dealt with sets the stage for monitoring, which takes the form of a consistent review of receivables activity.

Account Receivables