5 Necessary Due Diligence Steps for Factoring Account Receivables Published April 22, 2014
All commercial lenders, regardless of the type of financing offered, have some mix of due diligence in their credit decision process. Whether it’s a function of the pre-closing evaluation or an ongoing monitoring exercise, lenders are wise to manage risk in order to protect their relationships and collateral from exposure.
In the financing world of factoring account receivables it’s of particular importance that the due diligence process extends beyond just qualifying the invoice for purchase from clients. Specifically, IRS tax issues of the client can wreak havoc on the relationship that could be easily avoided and mitigated with the use of some proper due diligence tools.
Philip Cohen, president of PRN Funding, LLC, wrote great blog post titled, “Ongoing Due Diligence Ensures Healthy Factoring Relationships”, which clearly elaborates on 5 necessary due diligence steps for factoring account receivables:
1. Check the business name
2. Keep tabs on contacts
3. Identify tax issues
4. Find additional liens
5. Don’t forget account debtors
Obviously we’re biased at Tax Guard, but we think number 3, identify tax issues, is one of the most important steps a factor must have in their risk management tool belt. The IRS is the judge, jury, and executioner and can actually supersede the factor’s position relative to their purchased receivable. This extraordinary power and reach can have a factor staring at a losses in the millions! Believe us, we’ve heard these horror stories first hand. (If you want to read a more in depth exploration of how the IRS can affect factors, please read Jason Peckham’s article, “The IRS Collection Process: From Filing to Subordination”.)
Cohen put it best in his post when he said, “…tax issues often emerge quickly and a notice of pending action may arrive too late. Tax issues have dire consequences for a factor, as an IRS lien takes first position unless they choose to subordinate. Tax Guard is one service factors can use to stay ahead of tax problems.” And by too late, he’s referring to when a public record/UCC search indicates that an IRS lien has been filed. Tax Guard tells lenders BEFORE a tax lien is filed that their client presents a risk to them. Now that’s that the way to find peace of mind within your due diligence.
Please feel free to contact us to better understand how Tax Guard can fit into your existing due diligence processes.