Sound Bites From Underwriting – Gambling With a New Broker

At the Factoring Conference during a portfolio warning signs panel, Emma Hart, the COO of Sallyport Commercial Finance, was asked if she recalled any red flag situations that hinted at collusion. Whether in factoring or not, you can probably relate to this situation with a new broker:

We had one fairly recently that we should not have funded that the CEO of our business puts on. It was a slow one. We needed the deals. The client was a flour mill supplying flour to Indian restaurants. It was a special type of flour. I can’t remember what it was. He had 4 debtors. The invoices were for $14,500 each. Each of the 4 debtors verified by invoice perfectly and we never heard from him again. And every single one of the debtors claim to have paid him directly. He came to pick up the checks. We don’t even know whether they were valid invoices, whether they even parted with the money, but we never saw him again. And the warning flags were all over the place. They were bright red, weren’t they? It didn’t pass any of the underwriting criteria. The individual was not an individual of good character. He had some history, but the deal had been given to Nick [the company’s president] by a broker. We were establishing a relationship. We always say in our business and every other business, you know, the new sales people get a freebie. Nick doesn’t get any freebies ever anymore, but that was a first funding loss. So, that was a classic first funding loss. It didn’t pass any underwriting criteria. We did it because we were slow. We needed some business. It was a new broker relationship. […] So, that was classic case of collusion, but we should have known better. Absolutely. And he absconded.

This is one of several excerpts from this panel that we plan to post under the Sound Bites From Underwriting tagline.