We ABL folks have had our heads in the sand for far too long with respect to technology-based monitoring and business intelligence. ABL risk reduction starts with AssetArchive as the solution to reduce fraud and improve monitoring with little additional cost.
You can monitor ABL deals with
more Business Intelligence.
Traditional ABL has some monitoring, but not too much monitoring because of the expense associated with running an office that needs both space and people to do the extra work at some cost in cash. Factoring companies have tended to do smaller deals with higher risk levels where the monitoring and losses are paid for in the fee structure. Basically, ABL tends to be both a lower income and less monitoring cost model for a given loan. However, fraud and willful misconduct risks remain even with some reporting, periodic field exam reports and Loan Officer reviews.
Flavors of ABL
Monitoring levels in ABL will vary with the risk levels tolerated by a given Lender. The collateral is pledged to the Lender (not owned by the lender). High cash-flow deals with strong earnings, perhaps publically traded companies, Etc. could be Libor-2 pricing while a high growth startup company could be Prime+3 priced (maybe less / maybe more). These differences in risk levels tend to translate to monitoring levels that are less intense for the cash-flow deal and more intense for the higher risk deals. Some deals might get a monthly certificate balance with no cash controls and higher risk deals could include daily monitoring of sales, cash and even inventory.
The data coming in tends to be as simple as monthly aging and inventory reports to more intense levels of monitoring (for ABLs) that could include daily sales, cash or inventory reports. None of that report-level information is compared to anything on a daily or weekly basis. Some of the items could be selected for telephone or postal mail confirmations, typically on a random alphabetical basis covering the A-Z letters over 6-12 months. Field examinations can be annual to every 60 days depending on the levels of risk, trust, technical and legal issues, Etc. Financials might be spread monthly or quarterly.
Factoring-Like Details Would be Nice to see, but…
Factoring has more intense monitoring because the receivables are purchased and owned by the Factoring Company with replacement of the old ones that age out over 90 or 100 days or some similar structure. The invoices are tracked from cradle to grave and that means entering the data into a system that tracks and ages each invoice and cash application. The discount factor (thus the word Factoring) might be some percentage off of each purchased invoice (i.e., 5% for a 95% advance). But the cost to run the system includes getting that data into the factoring tracking software, applying cash and adjustments, confirming new debtors and major balances on a recurring basis (perhaps confirming up to the advance rate of 95% of receivables), field examinations, Etc. Income is higher, but so are the costs to run the operation for people, space and charge-offs.
ABL is simply a lower cost product to administer for people, space and charge-offs and the risks assumed by the Lender tend to be lower than that of a Factor. We can’t see all of the detail at this price level, but we wish we could find a way to monitor more with efficiency.
On a positive note, these different financing products fund the needs of Companies and provide different price levels based on different levels of achievement for the entrepreneur, company or entity.
Cost of Not Knowing
Monitoring takes data and time and it can be costly if you start applying cash to invoices like Factoring does. But what if you could dial it back a bit an use most of the data that you are already getting? What if your monitoring showed you some of the risks? What if you were alerted to the potential fraud areas or if you could confirm the risker items and not just take random stabs at it with A through Z Debtor samples?
Clearly ABLs have stayed away from tracking invoices and applying cash and confirming some A-Z items every month. But if you look at your process of gathering agings and inventory reports, you never look at the detailed data, even if you download some of it. Most ABL shops cannot answer the following questions:
- Does the aging foot?
- Does the aging age correctly?
- Who are the new debtors each month?
- Does the inventory report foot?
- Does the inventory report have the correct extended cost n the Total column?
- Are invoices reasonable amounts compared to the past?
- Are balances reasonable amounts compared to the past?
- Do invoices step-down to lower amounts as they age out?
- Can I confirm riskier invoices and balances?
- Can I find fraud and willful misconduct between audits?
- What are the trends of the Borrower Concentrations over time?
- What are the trends of the Borrower ineligibles over time?
The I don’t know answers are caused by a lack of detailed data and getting only the AR, AP and Inventory reports but not using the data in them because of the costs to do that.
“We’re an ABL shop, not a factoring shop and
the costs are too high to monitor that way!”
This is no longer true and a poor excuse to continue the old way.
But… What if you could monitor more like a factor and not have to pay for the staff, space and data management? What if the data analytics were less expensive than more staff and charge-offs?
THAT WOULD CHANGE EVERYTHING!
The Missing thing is Using Data
Most ABL shops are downloading agings somehow so that they can calculate ineligibles, get concentrations, and simply be more efficient. The smarter Lenders use our software AssetReader to get the data converted from reports and setup highly detailed ineligibles, foot reports, group credit memos, import addresses, Etc. But here is the kicker… with that data now imported, we can archive it and do data analytics to help you monitor a loan efficiently and with little effort. This is a systematic approach to using the same data that you are already uploading to save time, but now your monitoring is on steroids.
More means… That bullet list noted above becomes I do know for all items!
- An optional Confirmation module lets you use custom confirmation letters for each Borrower and the items pulled are risk based, not just random. You can also execute confirmations by email, fax, phone or call logs while gathering updated contact information for enhanced confirmation delivery methods over time.
- Hot-Spot reports of new risks are presented
- Metrics can be set as circuit breakers for large variations
- More analytics without the staff, space or time and at little cost
- Reduced charge-offs (what’s that worth?)
- Integrate ABL specific credit reports (coming soon)
Is the Solution Costly? (no)
What’s the cost? Our download software AssetReader already sets the standard for ease of use when downloading data for ABL specific reports and helps to keep the back-office and audit process efficient. Adding AssetArchive and the optional confirmation module is pocket change compared to any loss and the enhanced insights are going to improve loan monitoring and efficiencies. This level of business intelligence for ABL is clos to factoring, but without the cost of space and people to run it. A huge leap forward for ABL and you can keep your current Loan Monitoring System too!
Knowing Sooner is Better
Enhanced monitoring techniques that use data and business intelligence will help Lenders spot problems and mitigate adverse conditions sooner. That means shutting-down abusive Borrower practices, focusing on risk-based confirmations, reducing losses and making higher profits. It will also let you spot the problems sooner and not later, giving Lenders a chance to get rid of the junk before it blows up.
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