Marketing and Underwriting

“A VIEW FROM BOTH SIDES OF THE HOUSE”

By Debra Wilson, in collaboration with David Rains

In a perfect world, the marketing and underwriting departments work closely together as a team to complete due diligence and book good business in a timely manner. After all, that is the goal of the company; put the money on the street to earn interest income and fees. However, in too many cases, there is an adversarial relationship between the two entities as their goals are quite different, unless they can be educated to align the goals of each department to accomplish the overall mission of the company.

The primary responsibility of marketing is to source the transactions, deliver the proposal, and close the transaction. Marketing is not an easy task, especially in these times with so much competition, lower rates, the hair on many of the deals, tax liens, and the reluctance of banks to release their positions. With the interest rate so low, banks are retaining non-performing loans much too long. Additionally, today’s consumer is more informed and they shop rates unmercifully. Then, you have the additional challenge of certain factors that will lower their rates to the point there is no feasible way the rewards are justified by the risk. This hurts the industry as whole; however, the competition to book the deal sometimes takes the place of good common sense. All of these conditions have made marketing a much tougher proposal today than it was even 5 years ago.

Underwriting, on the other hand is the technical aspect. They must complete the due diligence, analyzing all aspects of the proposal; sales trends, average turn of the A/R, debtor concentration, historical dilution, profitability, industry concerns, the credibility of the principals and customer base. Their job has gotten tougher in the last few years as well. While fraud has always been present, it seems to have proliferated. Underwriting must determine what risks are involved in the deal, how those risks can be mitigated, and whether the transaction can be structured in manner that will protect the factor, just in case. No factor wants to fund into a workout or liquidation situation, if it can possibly be avoided.

This is where the conflict takes place. Marketing wants to get the proposal done, delivered and signed. Underwriting wants to be sure, the company’s position is secure. Management must constantly ensure that the right balance is in place to enhance the company revenue and yet safely protect against losses. In order to accomplish these lofty goals, it is essential that both marketing and underwriting learn empathy and work closely together. The very best shops have strong marketing and strong underwriting that do understand and respect each other’s function. In order to facilitate these relationships, the following actions might be considered.

In many of the cases, the marketing officer is the only one physically close to the prospect. It is vital that they try to get the whole picture. They should strive to understand what the prospect company does, their history, what issues they face in the marketplace, and especially the character of the principals involved. Marketing should ensure they have a good understanding of how the business flows and what events could help or hurt the company that they are proposing to factor. Banks rely primarily on the balance sheet and the liquidation value of the collateral. Typically, they could care less about the quality or the value of the accounts receivable. Factoring requires a much deeper understanding of how the business operates. If the marketing officer takes the time to learn about the prospect’s business and conveys that understanding to the underwriting department, it enables the underwriter to make a more informed decision and can often provide the reason to say “yes” rather than “no”. There is an additional strong benefit to the business development officer, if he takes the extra time to get to know the principals and the business modus operandi. When the time and effort is invested to understand and create a strong rapport with the owners/principals, these entities will feel like more care will be given to their account (their very livelihood), that they are special and not just another sale or commission to the business development person. Marketing is the front line and when the proposal is signed, it was probably signed with the factor the prospect thought would give them the best service, sometimes even if the rate is a little higher. It very well could be the difference in getting the deal or not. Management should encourage the marketing officer not only to collect the application and the other required documentation to complete due diligence, but to build the rapport, create the relationship, and gain as much understanding of the prospect’s business and industry as possible. Getting close to the decision maker before the proposal is delivered will increase the percentage of acceptance. Good leads and good deals are harder to come by and it sure hurts to lose a good deal when it might have been yours, but for just a little more time or a little different attitude in approaching the sales process.

Underwriting can also go a few steps further to create this perfect world. They should understand the challenges of the sales process. As mentioned, competition is fierce, leads are hard to come by and timely proposals are essential to closing the deals. Underwriting should look for reasons to say “yes”. If an issue comes up, this should not automatically eliminate the deal. A good underwriter will look for creative ways to structure the deal to protect the company and still get the deal done. Sometimes, this is not an easy task. The question should always be “Is there anything we can do, anyway we can mitigate the risk to make this happen?” Additional documentation, such as written verification of acceptance with no-offset language for bill and hold situations or clients in industries with historically high dilution, or a Letter of Credit which pays the supplier upon receipt of inspected and accepted goods instead of purchase order funding. There are many ways to structure any one deal. The ultimate challenge of underwriting is to structure a proposal, which protects the factor, addresses the prospect’s needs and does not alienate the account debtors. Of course, they must do all of this without establishing an account maintenance program that is so time-consuming that it no longer makes fiscal sense to the factor or the prospect. Certainly, this is can also be a daunting task, which requires a dedicated effort on the part of underwriting.

Additionally, there are the major time constraint issues on underwriting. Due diligence has to be thorough, but, the proposal needs to be timely in order for the marketing officer to be competitive (an essential element often lost in the process). There are times when a preliminary proposal is appropriate. This will allow the marketing officer to gage the prospect’s commitment and/or interest by requiring a good faith deposit to continue the balance of the due diligence. This can be a good closing technique by the marketing officer. It will allow the marketing officer go back to the client, present his proposal, pick up a check if required (which is the best indicator of a committed and closed deal) and get a signed contract which takes the deal off the street and out of the hands of your competitor. This type of approach and scenario will give excellent and expedient service to the prospect and additionally will give the marketing officer an another opportunity to review with the client any information, which may be important to the underwriting process.

As indicated, both of these functions in the company are vital. Without strong performance in both areas, a company will either falter or fail. Let either of the two become overly dominant and the company will ultimately suffer lack of sales by marketing or losses in the portfolio by operations due to the quality of the deals being booked. Strong leadership by management is necessary to ensure that these two functions operate as cohesive, yet separate units. The time dedicated to achieving this goal will be well spent. It is a vital key to resounding success in the marketplace today.

Debra Wilson is the Senior Vice President of Vertex Financial where she manages the portfolio operations and underwriting departments. Ms. Wilson is a current board member of "The Finance Forum", past board member of the International Factoring Association, has been a featured speaker and panel speaker at numerous factoring and finance conventions. Additionally, Debra is the author of the only commercially available “Factoring Operations Manual” published earlier this year, which could very well set the standard for the industry and is available through www.FactorHelp.com.

David Rains is President of FactorHelp, Inc., which is dedicated to providing the best resources for the factoring industry and has been involved in consulting to numerous factoring companies, both established and start-ups. Additionally, David is a board member of The Finance Forum and was featured on the Marketing Panel at the International Factoring Association Convention in 2003. With well over 25 years of sales and marketing experience where he has always been in the top 5% of producers, David has published numerous articles that pertain to business development in the factoring industry.