Commercial Factor Q&A: Jay Atkins Previews Upcoming Exit Strategies Class

In a preview of an IFA training class on exit strategies and workouts, Jay Atkins of Seacoast Business Funding provided an outline of the class and some insights on the workout environment for factors in 2022.

With inflation still rising, the supply chain still broken and interest rates increasing, the factoring industry and the overall economy seems headed toward a recession. For factors, that may mean an uptick in workout scenarios. To help guide factors through the potential coming storm, Jay Atkins, president of Seacoast Business Funding – a division of Seacoast Bank, will team up with Michael Ullman and Jared Ullman of Ullman & Ullman, P.A. to present a training class on exit strategies and workouts on behalf of the International Factoring Association. The class will be held from Oct. 10 to Oct. 11 at the Planet Hollywood Resort and Casino in Las Vegas. More information on registration and accommodations can be found here.

Atkins spoke with Commercial Factor to provide a breakdown of what the class will cover, who can benefit from attending and his perspective on recent and future workout activity within the factoring space.

What can you tell us about this class, both in how it will be structured and in terms of what it will cover?

Atkins: The class is going to cover issues and problems that occur within a factoring client during a workout type scenario. And the class will range from how you got into the problem, whether you properly structured the deal, all the way through what you do at the end and your potential outcomes, from an operational, a credit and a legal standpoint. So, it's going to cover all aspects of a problem client from beginning to end. But every client is different, so there’ll be different scenarios and different things that we’ll be addressing throughout the class.

What the class is really meant to cover is what everybody's worried about: when you receive bad invoicing in one form or fashion. We’ll look at how a deteriorating debt or credit market affects the transaction, as well as how a factor's ability to charge back invoices or buy new invoices affects their ability to get out of transactions. Right now, there’s a large amount of competing collateral claims with other products that are in the market that affect factors. So, we'll be discussing all of those topics throughout the presentation.

The presentation is set up to be interactive with the group. We'll be doing some case studies or case examples of what happens in transactions and how we got from the beginning of the transaction to exiting the transaction successfully.

Michael and Jared Ullman of Ullman & Ullman, P.A. will join you as instructors for this class. How do you think each of their perspectives, as well as your own, will enhance the class?

Atkins: I'm going to bring about 30 years of both credit risk and operational business experience. Within various entities, I've learned which things work and which things don't in certain scenarios, depending upon the nature of how the factoring company structured their transactions.

Michael brings 40-plus years and Jared brings 13-plus years of legal work with transactions that have been challenging situations and what they've learned, both from a documentation, collateral, bankruptcy and litigation standpoint, when something goes wrong in a relationship. I think that knowledge that they bring forward, as well the dedication to working with the factoring industry for as many years, is invaluable to the class in that perspective. We want to explain how it works and what the outcome can be based on what you’re dealing with at a given time.

Who do you think this class will be most beneficial for? Why?

Atkins: I think any portfolio people and credit people within a factoring organization could benefit from the class. Anyone new to the industry within the last 10 years, whether it be an owner or operator of a business who hasn't been on this path before, would benefit from the class.

I think it's the timing of the class that is most interesting. We haven't had an economic recession since 2008, and that would mean that there are factors that started in the last 14 years who have never been through some of the challenges they're about to face. So, I think the class is going to benefit any factoring company who started in the last 14 years, because we're going to dealing with economic changes, such as the end of the biggest government stimulus package in the history of the country, inflation rates not seen for 40 years and rising interest rates at a rate that we haven't seen since the early 2000s as well. All those things promote a challenge for our industry, both from a credit and a risk standpoint. And I think the class is going to benefit anybody who hasn't been through any of that and will need to be ready to deal with what could be coming by understanding what happens in workouts or when deals go in a different direction.

Broadly speaking, as you’ll get into more detail during the class, what are the necessary steps to successfully getting through a workout scenario?

Atkins: I think, one, you have to understand how you got to that position. So, a detailed analysis of how you got in the position that you're in, doing the look back. Then, you have to evaluate the due diligence, evaluating the credit perspective and evaluating the compliance procedures that you may utilize when evaluating your legal position in that transaction. And then as well, determine if you had an exit strategy when you got into the transaction and will that exit strategy work now when you possibly have to exit or fix the problem?

What are some of the other topics or focal points you’ll cover during the class?

Atkins: We'll be touching on how to utilize third parties in the transaction; how to deal with third-party risk in transactions; how to plan, both for success and for a failure, in the transaction. We’ll also be dealing with other legal aspects of the deal load, such as the litigation possibly in a workout scenario, the bankruptcy possibly in a workout scenario or the sale of a company. And then we’ll cover how to deal with any type of criminal ramification in a deal that went bad and how you deal with those things.

From your perspective, has there been more workout activity in the last few years than usual?

Atkins: There's definitely been less in the last few years thankfully because of government stimulus, Paycheck Protection Program money and Employee Retention Credit money currently. So, there's definitely been less workout. I think we've been in fantastic economic times, so the majority of the industry has really ridden the wave of a fruitful economy and I think, therefore, a lot of people haven't been in positions that they potentially could be in in the very near future if things continue down the path that they are on.

Do you expect workout activity to increase or decrease in the next six months to a year? Why?

Atkins: Based on history, if it's a protracted recession and interest rates continue to rise at the rate that they're rising at and sales start to slow based on what the current Fed wants to do, it will create a problem both economically within the small business community and even the mid-size business community going forward. All of the things that occur during a recession are detrimental to small business for the most part. So, factoring, the tool that we utilize to help them is always available to them in a down economy. And, historically, factors have done very well during recessions, but it also raises the risk profile of what you have to deal with going forward, and planning for that is part of any good factoring company’s operations.

What is your overall outlook for the factoring industry for the rest of 2022 and early 2023?

Atkins: I think it is going to depend upon whether we have a soft or a hard landing based on what the current economic environment is. That will really dictate where the factoring industry goes. If it's a slow, not really aggressive recession, I think we'll suffer a little bit in the beginning and then we'll pick up on the back side of that. But if it's a real hard landing recession where it's very ugly, I think we'll struggle in the beginning and on the other side for a certain period of time. I can remember back going almost 30 years now, and during the first two recessions I recall, we did very well as factors, but in the last three, we didn't do all that well. That was interesting because of changes in certain parts of the financial community, competition, change in bankruptcy law, as well as availability of some very, what I would call, predatory products. This could continue to get worse as it relates to how much business and how well we do going forward in a recession, especially in the latter parts of 2023.