Written by: Marc J. Marin, Managing Director, Gateway Commercial Finance
It’s the beginning of November, and we’re in the fourth quarter yet again. As I look back over the first three quarters and assess the year’s losses, I find myself asking which decisions contributed to those losses and what I could have done differently.
The first place I have to look is at myself. It’s my company. I make the underwriting decisions and review fundings daily.
Accountability starts with me.
I’ll admit that, after nearly 20 years of running my own company and entering my 32nd year in the industry, I sometimes catch myself thinking I’ve seen it all before and can manage whatever comes next.
Then a loss hits and I revisit the reasons I should have passed on the deal in the first place.
I have experience, a seasoned staff with capacity, excellent tools, and a balance sheet that allows me to be selective. I understand the risks going in. Yet somewhere along the way, I convinced myself those risks were manageable because we were the ones managing them.
Like the next guy, I have underwriting policies and procedures. They were written to define our risk appetite and keep us from repeating the mistakes of the past.
Let’s get real, we’re factors. We’ve operated in a brutally competitive, shrinking market for years. If there’s volume, a debtor we can find on Dun & Bradstreet, an owner with a pulse and something resembling financials, one of us is going to take a run at it.
That’s the market we’re in. It hasn’t changed. But it also makes a convenient excuse for decisions we know better than to make. Portfolio growth, replacing a large client that left, entering a niche you know nothing about, whatever your rationale.
Earlier this year, I approved a deal referred by a good broker of ours. It hit every one of my red flags. I then ran it through our AI underwriting tools, which gave me another two dozen reasons to pass.
I funded it anyway. Despite my experience, the overwhelming negative information in front of me, numerous objections from my staff, and a disinterested third party named Claude.
The loss is immaterial and it won’t make a dent in our bad debt reserve, but it stings because I knew the deal was garbage the moment it crossed my desk.
I wasn’t missing information. I was ignoring it.
In this case, the hallmarks of hubris (overconfidence, disregard for warnings, and a lack of humility) were all present in my decision to approve the deal. The resulting loss was mine to own, I’m not even mad at the broker.
The uncomfortable part of reviewing my losses is recognizing how often I understood the risks before I funded.
I saw the weaknesses, but my confidence in managing them carried more weight than the facts themselves. Understanding how I allowed that to happen means taking an honest look at my overconfidence, the warnings I dismissed, and my willingness to listen.
Overconfidence and Hubris
The reality of factoring is that we can dot every “i” cross every “t” get the paperwork in order, run it through AI, obtain the debtor’s acknowledgment and cooperation and still take a loss.
Those minimal requirements and safeguards matter, but they don’t eliminate risk. Overconfidence creeps in when we convince ourselves they do, or that our experience will carry us through whatever they don’t cover.
In nearly 20 years, I’ve had only three instances of credit losses caused by debtor bankruptcy. Every other loss has stemmed from a client failure, debtor dispute or a payment made to our client despite our notice of assignment, where pursuing the account debtor made little economic sense.
That history should inform my underwriting. It should also remind me that a creditworthy debtor, a complete file, verifications and historical payments are no guarantee of collection.
Once I convince myself I can manage whatever comes next, it becomes easier to discount the evidence suggesting otherwise.
The warning signs are still there; I just start treating each one as something I can work around. Before long, I’ve built a case for funding a deal that I would have advised someone else to pass on.
Ignoring Warnings
Most factoring opportunities come with warnings.
The problem is that once I’ve decided I want to do a deal, I can become remarkably good at explaining them away. A warning doesn’t become less meaningful simply because I have a plan to manage or mitigate it.
When we huddle at conferences, listen to Michael, Jared or Bob, read about a loss, or gossip about the latest fraud, most of us can work backward and identify potential conditions that allowed it to happen.
We question the underwriting, how they could have been comfortable with the concentration, were they actually testing and verifying, what were the results, were they staffed properly, or how the experienced operator potentially saw the warning signs and explained them away.
With the benefit of hindsight and no money in the deal, the mistakes seem obvious.
The harder exercise is applying that same scrutiny to my own decisions while I still have money at risk. It’s easy to ask, “What were they thinking?” It takes humility to ask, “Where am I doing the same thing?”
I’m not a prophet, and everything I’m writing has been said or written a thousand times before, but it’s worth pointing out again.
Concentration is Risk
Whether a large client or a strong debtor can make a large concentration feel comfortable, but credit quality is only part of the exposure.
A dispute, offset, payment delay or fraud can put the entire relationship out of formula (not to mention create a problem for yourself with your senior lender). If one account can materially affect my equity or borrowing capacity, I need to consider whether I’m underwriting the risk or simply betting on the outcome.
Client Character
A client who misrepresents something during underwriting has already told me something important.
I can structure around certain financial weaknesses, but I cannot build a working relationship with someone who’s not trustworthy.
Believing that tighter controls will make a dishonest client behave is its own form of overconfidence.
It took me years to fully appreciate how much character matters in an underwriting decision. We underwrite the collateral, monitor it, and collect it. But when that collateral falls short, becomes disputed, or debtor cooperation disappears, we find out who we’re really doing business with.
The client’s honesty, cooperation, and willingness to stand behind their obligations can make all the difference.
Assuming I can control my way around a character problem is another form of hubris.
Capacity: Deals Too Big to Chew
Large opportunities can really move the needle….in either direction if you’re not mindful.
A deal can be too big for me financially, operationally, or both. Having enough availability on my line doesn’t mean I have the staff, systems, experience or financial cushion to manage the exposure when things go wrong. I mean after all, that’s what we should be underwriting right?
The fee income is easy to picture, the demands of a workout or restructuring capital or equity deserve equal attention.
Industry Familiarity
An invoice may look familiar while the business behind it operates under rules I don’t fully understand, or care to work with.
We entered the transportation space during COVID and learned enough to leave it to the specialists. It’s highly factorable, with generally good-quality paper and plenty of volume.
But the customer base and competitive dynamics made it a poor fit for us. Recognizing that was reason enough to move on.
Acceptance requirements, offsets, retainage, advances, embedded financing, billing practices, warranties, contra accounts, allowances, and contractual obligations can all affect whether an invoice is collectible.
If I don’t understand how those pieces fit together, I may be advancing against something worth considerably less than its face value.
Experience in factoring doesn’t make me an expert in every industry I’m willing to fund. Hubris tells me I can figure it out as I go.
Experience has taught me to stay in my sandbox and understand its boundaries.
Verification Results
Verification loses its value when I interpret an unclear response as the answer I wanted. Like many, we’ve moved to try to communicate with debtors via e-mail… holds up better in a dispute but its not perfect.
We carefully phrase our emails to obtain clear confirmation from the debtor, along with any additional assurances or representations we’re seeking. Email gives us an opportunity to swing for the fences and get a response that covers all the bases.
But sometimes, all we get back is “Acknowledged” or “Yes.” When we’ve asked several specific questions, some requiring more than a one-word answer.
What has the debtor actually confirmed and how much am I reading into it because I want to fund?
Confirmation that an invoice was received doesn’t establish that the work was accepted, the goods were delivered, or the amount is owed without dispute. If a material question remains unanswered, it’s still unanswered when I release the funds.
In practice, a debtor’s payment history often fills the gap when verification is missing or falls short.
“They’ve always paid us” becomes the justification for advancing. That history matters, but it doesn’t resolve a question about the invoice I’m purchasing today. Hubris creeps in when I convince myself that past payments make the unanswered questions safe to ignore.
Payment & Performance History
A debtor’s actual payment behavior deserves more weight than my client’s explanation of it. Repeated delays, partial payments, broken promises, and recurring disputes can reveal problems that a credit report won’t capture. “They always pay eventually” offers little comfort when my advance remains outstanding and my options are narrowing.
Ability to Communicate with the Debtor
Getting timely, meaningful answers from debtors is becoming increasingly difficult.
Outsourced A/P departments, AI-driven responses, and vendor portals that provide little useful detail can leave us with unanswered questions and delay timely funding.
If I cannot reach someone who can confirm receipt of an invoice, or approve an invoice, explain a skipped payment, provide a payment status or confirmation of a change in the remit to address, affects my ability to manage the account which is limits me from the start.
I need to recognize that limitation before funding. Assuming I’ll be able to get answers once my money is out the door is another way confidence can get ahead of judgment.
Client Compliance
I’m always dumbfounded when I hear that a fellow factor doesn’t require monthly financial reporting from clients. It’s more common than you might think.
If I believe I can adequately manage a relationship without it simply because I know the client or the invoices are paying, I’m putting far too much faith in my own judgment.
We’re sticklers about obtaining regular financial information from our clients (A/R reports in summary and detail format, A/P reports, financial statements (if generated), bank statements and customer lists) monthly, at a minimum!
This is a condition of the relationship. We want to understand the client’s overall financial condition, identify trends, and see how our exposure is evolving. When you’re in workout and you don't have a current aging report or customer list you’ve allowed the client to be steps ahead of you.
That means looking beyond the receivables we’ve funded. What new collateral has been generated? What collateral is now gone, collected, or converted into something else, and where did the proceeds go?
Have new liabilities appeared? Are contra accounts creating potential offsets? How is the client using our advances, and is that money supporting operations or covering a growing hole somewhere else (think MCA payments).
Regular reporting gives us the opportunity to ask those questions while we still have options. Collecting the information without reviewing it, or repeatedly accepting incomplete answers does little to protect us.
Not requiring this information amounts to keeping my head in the sand. Assuming everything is fine because collections are coming in is another form of overconfidence.
I have a lender to answer to, employees and other clients who depend on this company, and equity to preserve. Understanding what’s happening under the hood is part of my responsibility.
Gut Check
For me, a lack of humility shows up when I give my experience and judgment more weight than the facts in front of me.
I see the warning signs, hear my staff’s objections, and convince myself I know better because I’ve handled situations like this before.
Instead of asking what I might be missing, I start defending the decision I’ve already made.
At that point, what value do my people, policies, underwriting tools or experience provide if I dismiss them whenever they disagree with me? Owning the company gives me the authority to make the final decision. It doesn’t make that decision right.
I can’t promise I won’t take another loss, but I can do a better job of listening before I fund and questioning my own reasoning as closely as I question everyone else’s.
After all these years, I still need to recognize when the biggest risk in a deal is my determination to do it.
I once heard that “the only deals you regret are the ones you do”.
In December, I’ll be moderating a panel on Fraud and Losses, and I hope you’ll join us.
Whether you’re new to factoring or have a few hard-earned stories of your own, we’ll share candid experiences, have some fun, and leave you with practical takeaways to help spot trouble before it becomes your next lesson.
IFA Virtual Fraud Forum
Hear from Marc and other factors, attorneys and technology providers during a two-day virtual workshop designed specifically for professionals in the factoring industry, where we'll tackle one of the most pressing challenges: fraud. As the factoring landscape evolves, so do the tactics employed by fraudsters. This comprehensive workshop will provide you with the insights necessary to recognize, prevent, and respond to fraudulent activities that can threaten your business. For more information, go to https://www.factoring.org/ifaevents#Fraud_12-26
About the Author
Marc Marin is the founder of Gateway Commercial Finance and a regular author for various publications on factoring and business management, including Forbes, Yahoo Finance, Commercial Finance Institute, INC, Monitor Daily, Factoring Journal, Finance & Commerce. He is also coauthor of the financing training guides, Invoice Factoring & Asset-Based Lending. In addition to being the owner of an invoice factoring company, Marin is also a veteran in the field of financial products, and has closed over $5 billion in accounts receivable factoring volume throughout his career.
Before launching Gateway Commercial Finance (an invoice factoring service provider) in 2007, Marc Marin was Vice President of Business Development at Bibby Financial Services, Inc. Over his nine years there, he led broker development, client services, underwriting, and operations. Prior to that, he served as National Business Development Manager at Sun Capital.
Marc is not only a lender but also an educator, philanthropist, and entrepreneur at heart, which is why he has built up a reputation as a relationship manager and strong advocate for small businesses. He’s committed to fighting for the underdog, promoting lesser-used factoring services, increasing cash flow, and helping business owners navigate their financial challenges by promoting financial products that strengthen supply chains.
Marc has a strong customer-centric focus, so he always makes himself available to answer questions and offer practical solutions to businesses that are looking to boost working capital and increase cash flow.
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.