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invoice factoring industry is expected to grow significantly as the economy continues to soften. The threat of recession will likely increase the demand for services. The onslaught of the sub-prime mortgage crisis and high adjustable rate mortgage reset in the next two years is added to the parameters already slowing economy.
Because of the predicted recession, face invoice factoring business combination incredible opportunity and potential risk. If recession occurs, it will probably be a shakeout in some industries. Some sectors are already getting hit hard, such as construction, property management, and building supply manufacturers. However, often difficult to decide which one will pass before it happens in reality. That is why it is very important for lenders of all sizes to upgrade the underwriting process and structure. Equally important is the need to have effective surveillance systems to detect if a company is just going through a natural down cycle or very existence is threatened.
It is important for the factoring client to understand the Enhanced underwriting and performance monitoring processes are not just a way to limit the risk in financing. They are also important tools that can help the company maximize performance and even keep it from extinction.
Assessing the current financial company
In the early 1960s, Edward Altman developed a mathematical model to determine the financial health of the company and forecast of bankruptcy which is still used today. Called Altman Z-score, it uses five ratios composed of eight teams from the consolidated financial statements. The five ratios and weighted average for each ratio in relation to total as follows:
Ratio weighted average
EBIT / Total assets 3.3
Net Sales / Total 999
Equity Mkt. Value / Total 0.60
Working capital / Total assets 1.2
retained earnings / total assets 1.4
After inserting the figures obtained from the company’s balance sheet and income statement and come up with a total, but model asserts the following:
A score of 3 reflects the company on a firm footing
between 2.7 and 2.99: The factoring company should exercise caution and require increased monitoring.
Between 1.8 and 2.7 :. There is a good chance the company will go bankrupt within 2 years
Less than 1.8 94% chance that the company will have to file bankruptcy next year.
The Z score is just one tool in the arsenal of the person responsible for determining whether a company is good (or bad) candidate for invoice factoring. Another fundamental interests of methods should be used in conjunction with the Z-score such as financial trend analysis of income, expenses, and profits. In addition, there may be internal and external factors that may alter the proportions in the future as new products roll-outs, mergers and new competitors in the industry.
Monitoring Results
The factoring company should constantly monitor performance, preferably monthly. If two or more of the ratios used in the Z-score reflecting adverse trend, the lender should meet with key employees of the company to discuss strategies for improvement. Again, the client should understand that this is not bullying tactics. The meetings are essential for the viability of the company. If it is determined that performance improvements are unlikely in the near term, the customer should refer to the turnaround specialist. These types of companies are adept at development of a highly disciplined and urgent solution.
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