Back to the Basics - Your Deal on Day One
Written by: Steven N. Kurtz, Esq., Partner, Levinson Arshonsky Kurtz & Komsky, LLP
The purpose of the occasional back to the basics series is to pick a fundamental concept and do a deep dive. Just like sports, math, writing, or any other endeavor, you need to master the basics and keep returning to the basics in order to keep your skill set up. This article is equally relevant to someone with forty years’ experience as well as trainees. You must master and keep returning to the basics. This article will focus on fundamental due diligence concepts which should be in place before day one of your deal.
Although we have an emphasis on technology and speed in the commercial financing world, our core concept is that you put out money and expect to be repaid at your anticipated rate of return. That means knowing your factor client/borrower.
Back in the day, for those that have been in the business more than two decades, most of you put eyeballs on the client/borrower at least once before a signing your agreements with went ink signatures on paper documents (and sometimes before a notary). There is absolutely no reason why you can’t have a face to face conversation with a video call.
Also, review the back-and-forth emails which enable you to authenticate that you are actually dealing with a real “person”, with a real business, and presumably in their represented location. You should also record the conversation (with their written consent and once given, it is good) and make it clear that the conversation is being recorded for security reasons. This gives you a chance to see your person and get assurances that you have a real deal. There has been a lot of cyber fraud impersonations/stolen identity/stolen money happening in our industry, which was part of the inspiration for this article.
Since we are talking about your factor client/borrower, do a background check on the principals and control persons at your prospect, even before the call. There is a lot of public information out there and several good programs that can quickly find what you need. One would be surprised at the number of problems that have crossed my desk where the principals or key players have criminal records or bad civil litigation that can be found online. Most criminal matters should be an absolute no, with the possible exception of one DUI or something silly during a spring break bender years ago. Even multiple traffic incidents should be a red flag resulting in a no-go. Civil lawsuits should be looked at closely and discussed. All this information is at your fingertips - use it.
Since I’m on a rant and giving everyone my day one wish list, next up is a good checklist. Everyone should have it, most of you do, some of you even continue to use one. Your check list should have your deal from the beginning to the end and should be used. Larger organizations have written policies and procedures for each situation, most of these are long, don’t always read well, and in reality, are only looked at by investors, buyers, lenders, and upper management. A good simple checklist readily accessible (with a reference to your policies and procedures, if you want) is easy to use and gets right to the point. For anyone who wants mine, just ask and we will send you our form.
Every experienced lender/factor figures out before day one how to get out of the deal. This concept needs to be instilled from the top down. For factoring and asset based lending, it’s your collateral-duh. But, this is much more nuanced. By knowing your factor client/borrower and the underlying collateral, plus the account debtors, one can wrap their heads around the exit strategy and have a plan in place on day one. Each situation is different.
Since we’re discussing collateral on your day one, you must get it right. That means attachment and perfection of your collateral. Attachment in a nutshell is the provision in your agreement to grant collateral in your financing document to secure your client’s/borrower’s obligations to you. You perfect your security interest in the collateral, in most instances through your UCC-1 (but know what is not perfected with the financing statement).
To get it right, you will need to have the official organization documents for your client/borrower reflecting that it’s filed. You will file your financing statement in the state of organization using the exact name as written in the organization document. The requirements for proving perfection are running a certified search in the state of organization using the exact name and if your financing statement shows up in the search, you are perfected.
For financing humans, my first request is to insist that the person use a service to incorporate or file an LLC since nobody wants their personal assets exposed for business liabilities if it can be avoided. But, if you finance an individual, then you perfect by filing the UCC-1 in the state where the individual resides using the name on the official identification, like a Real ID. The problem with an individual is that you can lose your perfection if the person moves to another state or changes the name in marriage.
In addition to anticipating income if the deal goes well and performs, one should also sort out what can go wrong. While admittedly some of this comes from experience, something that everyone hates when it happens, one must anticipate how this particular deal can go wrong, and how to prevent that from happening. That’s understanding the account debtors, learning about the client’s business, understanding what is critical for the business to operate, and then plan. With this in mind, the regular day to day underwriting and processes can and will go better. Also, every so often, have regular check ins with the client/borrower. It can be done under the guise of client satisfaction and success (yours mainly), but actual face time with the client/borrower keeps you locked in the deal.
There are multiple industry specific tech platforms that should be utilized on day one. These include the background checks, fintech/banking software to give you an understanding of what comes in and out of the bank accounts, and products that monitor for lawsuits, tax compliance and liens. Running this check on day one, and beyond, are some of the tools needed to keep up with the fast pace of the industry and the even faster pace on how something can go wrong.
While there is a bunch of time spent in the industry on how technology can improve your business and profits, there is also the dark side. Most bad actors are tech savvy and employ their skills to steal and do bad things. As part of this article, I asked my personal ChatGPT how one commits fraud against a factor. I was told to the effect that the program can’t help me commit fraud, but given my legal and finance background, here is some information on how a person can defraud a factor. The information that came back was spot on and quite detailed, a big difference from my earlier article ChatGPT v. Steve Kurtz. The bottom line is that while criminals and bad actors typically are not the brightest bulbs and tend to have a screw or two loose, technology has made it easier to do bad things. This tech can also be used to protect you.
Sometimes the best deals are the ones you don’t do. If a deal is turned down, it’s probably best not to pick it up again just because you want the business. Day one of your deal is the most important. That is where you can assess that you have followed your processes, used your arsenal of available tools to check out your deal, review your deal check list and have everything in place before the funds “go out the door”. Hopefully, this article helps and keeps you on a profitable path.
About the Author
Steve Kurtz, Esq. is a seasoned attorney with expertise in commercial and bankruptcy litigation, as well as complex commercial finance transactions. He has led numerous high-stakes commercial cases and now divides his time equally between litigation and transactional work, serving a diverse clientele, including financial institutions and fintech lenders.
Beyond his legal practice, Mr. Kurtz has served as a Judge Pro-Tem in Los Angeles County and actively engages in pro bono work. He is also deeply involved in his community, serving as the President of the Calabasas Shul and leading an active lifestyle with his family.
He holds a B.S. in Psychology from San Diego State University and a J.D. from McGeorge School of Law. He is affiliated with several prestigious legal organizations and has been recognized as a "Super Lawyer" by Los Angeles Magazine for multiple years. Additionally, he is a published author and frequent speaker at finance and legal conferences.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.