Trust, but control: the early warning systems in factoring
The pandemic strongly disrupts the timely delivery of trade commitments. Continuous monitoring of the customer, contractor or supplier is a must.
Out in the world, everything has changed, but for banks or factoring companies one thing remains the same: the care for the quality of their factoring portfolios.
Factoring itself brings many additional benefits which, in the era of uncertainty, may help catch the irregularities appearing in a given contract.
Early warning system
One of these benefits is the Early Warning System, which monitors contract behavior on an ongoing basis, detects contract anomalies and passes them on to the appropriate risk, monitoring or recovery department.
An example of this can be catching delays in payments from individual contractors. If the average payment delay increases from 5 to 10 days, the contract operator will receive a warning signal. It does not have to be an indicator that cooperation with a contractor should be terminated – it only indicates that the contractor is worth having a closer look at. This is to prevent a situation in which the funds to be returned by the buyer of goods will never reach the seller, factor or bank.
Usually the factor finds out about the customer's non-payment or other problems when the money does not come for a long time. Then one has to start a tedious and expensive debt collection process. Information about even a small increase in overdue payments helps avoid this situation. Factor or bank may react, assuming that prevention is better than cure.
One should remember that in a factoring agreement it is the contractor who plays the most important role. They pay for goods with a deferred payment date, e.g. 60 days after the purchase of goods. That is why knowledge about contractors is so important in case of factoring.
The Early Warning System can also be used to catch behavior that is unusual for a given contract. If, on average, a company reports 30 invoices per month, then if it submits 3 times as many during that time, it means that something may be wrong.
Today, when everything is happening online, the factor pays out the invoice within 2-3 hours after an order is made in the system. What's more, one usually doesn't even have to present a scan of the invoice, which was still unthinkable 10 years ago. At the turn of March/April this year, factors in Poland recorded a significant increase in the conclusion of factoring contracts. Many customers, in these difficult times, want to get access to cash "just in case". However, there will also be those wanting to take this opportunity to use deception to obtain funds. The information about increased activity on a given contract can prevent this.
Early Warning Retention
It is also worth to mention the Early Warning Retention – the information that factors or banks can use to avoid a customer leaving for another financial institution. Here the system will catch a decreased activity on a contract. It doesn't have to mean a company is ready to change the provider of factoring or banking services, because there are a lot of seasonal companies on the market, which use financing in certain months. However, such information may come in handy in difficult times.
Often a bank or a factor learns about a customer wanting to leave when it receives a termination notice. This makes preventive action impossible. Contacting the customer and discussing the terms of the contract, such as extending payment terms or increasing the advance payment, will in most cases suffice. Losing a customer is very costly. But you can, and must, protect yourself from it.
The customers of Early Warning Solutions are not only banks or factors. They are mainly used by the customers of these institutions, who receive information whether a given customer is solvent and whether it is worth selling them goods with a deferred payment date.
The coronavirus pandemic will pass, restrictions will be relaxed, and the economy will start off anew. The trust that banks, factors and other financial institutions build today will bear fruit in the future. Even if the trust is supported by a little control factor.
Karol Leszczyński, Factoring Product Manager, Comarch