| The invoice factoring industry is expected to | | | | Equity Mkt. value/Total liabilities .60 |
| grow substantially as the economy continues to | | | | Working Capital/Total Assets 1.2 |
| soften. The threat of a recession will likely | | | | Retained Earnings/Total Assets 1.4 |
| increase demand for the service. The onslaught of | | | | After inserting numbers derived from a |
| the sub-prime mortgage crisis and the high rate | | | | company's balance sheet and income statement |
| of adjustable rate mortgage resets in the next | | | | and coming up with the total, the model asserts |
| two years are added variables to an already | | | | the following: |
| slowing economy. | | | | A Score over 3: reflects a company on solid |
| Because of the predicted slowdown, invoice | | | | footing |
| factoring companies face a mix of incredible | | | | Between 2.7 and 2.99: The factoring company |
| opportunities and potential danger. If a recession | | | | should exercise caution and require increased |
| does occur, there will likely be a shakeout in | | | | monitoring. |
| several industries. Some sectors are already | | | | Between 1.8 and 2.7: There is a good chance of |
| getting hit hard, such as construction, property | | | | the company going bankrupt within 2 years. |
| management, and building supply manufacturers. | | | | Less than 1.8: 94% chance that the company will |
| However, it often difficult to determine who else | | | | need to file bankruptcy within the next year. |
| will suffer before it actually occurs. That's why it's | | | | The Z score is just one tool in the underwriter's |
| very important for lenders of all types to upgrade | | | | arsenal to determine if the company is a good (or |
| its underwriting processes and structure. Of equal | | | | poor) candidate for invoice factoring. Other |
| importance is the need to have effective | | | | fundamental methods should be used in |
| monitoring systems in place to detect if a | | | | conjunction with the Z-score such as financial |
| company is just going through a natural down | | | | trend analysis of revenues, expenses, and profits. |
| cycle or if its very existence is threatened. | | | | In addition, there may be internal and external |
| It is important for a factoring client to understand | | | | factors that could change the ratios in the future |
| that the enhanced underwriting and performance | | | | such as new product roll-outs, mergers, and new |
| monitoring processes are not just a way to limit | | | | competitors in the industry. |
| the funding company's exposure. They are also | | | | Monitoring results |
| valuable tools that can help the firm maximize | | | | The factoring company should constantly monitor |
| results and even keep it from extinction. | | | | results, preferably monthly. If two or more of the |
| Evaluating a company's current financial stability | | | | ratios used in the Z-score are reflecting an |
| In the early 1960's, Edward Altman developed a | | | | adverse trend, the lender should meet with key |
| statistical model for determining a company's | | | | company personnel to discuss strategies for |
| financial health and a predictor of bankruptcy that | | | | improvement. Again, the client should understand |
| is still used today. Called the Altman Z-Score, it | | | | that these aren't bullying tactics. The meetings are |
| uses five financial ratios comprised of eight items | | | | essential to the company's viability. If it is |
| from a company's financial statements. The five | | | | determined that performance improvements are |
| ratios and weighted average for each ratio in | | | | unlikely to occur in the near term, the client should |
| relation to the total score as follows: | | | | be referred to a turnaround specialist. These type |
| Ratio Weighted Average | | | | of companies are adept at structuring a very |
| EBIT/Total Assets 3.3 | | | | disciplined and urgent solution. |
| Net Sales/Total Assets 999 | | | | |