We can help any lending institution facing issues of liquidity, covenant restrictions, and compliance. Our interest is not limited to your "good" receivables. We are willing and able to purchase ALL accounts, including those that are delinquent or have been charged off.
We are diversified in several areas of consumer finance, investing in companies and unique opportunities that can organically grow without constant management oversight from VION.
Stacey Schacter Featured on CoporateLiveWire.com's Round Table Discussion on Asset Based Finance
The following excerpts are from a round table discussion on corporatelivewire.com. Click here to view the full discussion with other leading experts.
Stacey J. Schacter
Vion Receivable Investments
T: +1 678 823 6181
Owner of an international receivable purchasing entity focusing on the entire life cycle, including performing, sub-prime, re-performing and defaulted receivables of a consumer or commercial nature.
1) Why choose asset based finance?
When companies need liquidity they normally need it quickly. This is one prime advantage of asset based financing. Borrowers get accelerated cash flow thereby supporting their working capital needs. Customarily, companies will use their current assets as collateral for the loan liquefying their cash position instead of waiting for their product to sell and then collect the receivable generated from the sale. This can hasten cash flow by as much as 90 days or more. Most asset based lending is on a revolver basis, so the company only needs to draw down the funds as needed, which helps keep interests cost low. This structure provides advantages over term loans which have more rigid repayment terms better suited for fixed asset needs, such as expensive machinery and equipment or real estate. Companies need to remember that ABL revolvers merely accelerate cash flow expected to come in the future; ABL borrowing does not add new cash to a business.
2) Traditionally, asset based lending funds have been utilised by asset-intensive businesses such as wholesalers, retailers, durable goods firms and companies in the oil and gas sectors that are looking to optimise their cash flows. Is this still the case or are firms with a wider variety of intangible assets now taking advantage of this method of alternative investment?
ABL lending was once a financing of last resort for companies with poor credit ratings or experience who failed to qualify for more traditional unsecured types of funding. Not only has ABL lending become mainstream for all types of businesses, those businesses can now utilise intangibles to increase their borrowing base. Whether they should is another matter. Intangibles, such as patents, trade names or trademarks, are stripped away from the company and put into a special purpose entity. If the underlying ABL loan defaults, the lender can then access the brand for management or sale purposes. Intangible financing generally works with established brands or products. Start-ups or companies in smaller markets will have difficulty in utilising this additional asset as a financial resource.
3) What asset-based misconceptions currently exist?
Management often believes that ABL lending is expensive and that the companies that use it are financially weak, but that is far from the truth. Most companies using ABL are doing it as a way to manage cash flow in an efficient manner. Further, costs have come down industry wide due to competition. As with any lending: the better your credit, the better your rate. It is important to look at all the fees associated with each type of lending to really see which version of financing is cheaper and consider the flexibility you get with ABL vs. traditional term facilities. Often these non-monetary handcuffs have a very high cost. The last myth that comes to mind is reputation risk. Some companies believe taking an ABL loan attaches a stigma to the company. Yet, the top 31 companies produced over $17.5B in ABL loans in 2012(1)to many companies that are quite healthy and common household names.
5) Have you witnessed any prominent strategies such as revolving credit facility ("revolver") or floor plan finance in your jurisdiction?
Due to high competition, companies are becoming creative by using old tools to do new tricks. For example, borrowers using credit insurance can get better rates from ABL lenders since the risk of underlying customer default is lower. It allows greater advance rates and increases eligible AR that otherwise might not qualify due to aging. Other tools have returned to pre-crisis levels, such as over-advancement, aggressive advance rates and lower pricing. We have been involved in hybrid structures where we might advance against one asset on an ABL basis while more traditional lenders come in on a project finance basis. I tell people that today in order to succeed you can't put your customer in your box, you have to build your box around the customer.
6) What fraud detection and prevention strategies should lenders put in place?
We have forensic accountants on staff as fraud, unfortunately, is so pervasive. Every lender must have a designed plan for every credit. We start off every deal with a simple internet search. Each plan should include: a) reviewing documentation; b) providing the customer with a prioritisation on the needed documentation and data so the loan can be closed quickly; c) identifying interview candidates and actually conducting interviews (it must include the people actually doing the work, not the higher up executives); d) pulling invoices (make sure it's a statistically significant sample from at least the last 12 months) and follow the cash through the entire process; e) examine the accounting system for controls; f) background checks on the principals of the company and g) talk to your customer's customers. Don't let your client set up the calls. This is only a sample. We have a lengthy checklist that we look to depending on the circumstances.
7) How does a lender determine the appropriate advance rate on eligible receivables?
Normally the best predictor of future collections is past collections. The more data points we can collect the more comfortable we are with the advance rate. We look at payment patterns, including customers who consistently slow pay, but pay anyway and factor that into the calculation. We choose not to use a set definition for unqualified AR (such as 60 days delinquent), but rather take a more holistic approach to the credit. We also look at what must be done to collect the receivable in the event of a customer default. Is it a high cost decentralised operation or a centralised location with competent staff? It is important for both borrower and lender to understand what impact the form of borrowing will have on the borrower. Simply, can they afford it and for how long? No one wins if one party fails.
8) To what extent is it difficult to accurately value assets for collateral purposes?
There are four major types of assets used for ABL: accounts receivable, inventory, equipment and real estate. The easiest of these to value is typically accounts receivable and the most difficult inventory, though it is often used in ABL loans. Receivables normally follow set trends and collection rates will not normally have wide swings. Receivables collect out quickly, providing fast liquidity for the lender. Predictability is paramount for most ABL lenders. Inventory, on the other hand, may be unique, in various stages of processing, and subject to disputes from clients. For example, an apparel manufacturer may regularly sell to a big box store. Once the store finds out the company is in distress they may reduce orders and return portions of prior orders and take other actions that could imperil the receivable as well. However, inventory does replenish quickly and can be liquidated faster than real estate. Real estate may have a special purpose and typically takes much longer to liquidate, so advance rates may not be as high as for receivables. Equipment is normally easily valued, but advance rates are low due to the unique nature of equipment for a given company. For example, store fixtures may only be worth five to ten per cent of original cost. Equipment and real estate are more typically part of a term loan facility than an ABL program as ABL lenders typically advance based on cash flow and real estate and equipment do not fit that mould well.
9) How has the level of due diligence on the quality of the asset increased in recent years?
The "Great Recession" was a worthy teacher. Companies quickly found out the assets they thought had value were worth far less than anticipated. There are really two types of diligence, credit and legal. Many people focus on the credit only to get hung up unexpectedly on the legal aspects of a transaction. Understand up front the need for legal structures and bank account arrangements. Your bank may not have the same urgency you do to get a deal done quickly, so talk to your banker early on to explain that you may be looking at an ABL arrangement. Even though covenant restrictions have decreased, the diligence to get the deal done has increased. While lenders have become more aggressive on easily valued assets, unusual assets may still be tough to get through the process. A well-organised borrower can literally save weeks in getting a deal done. Anything that can help the field auditor get through the valuation will be appreciated and certainty of valuation translates into higher advance rates.
10) How often should asset-based lenders monitor the collateral to ensure that the amount of funds being borrowed results in an acceptable loan-to-collateral value?
On-going monitoring of collateral helps maintain the business relationship. A lender that frequently monitors collateral for the borrowing base can usually make more funds available to the borrower. Monitoring is not the same as on-site monitoring, which early on may be as frequent as quarterly or infrequent as yearly, depending on the type of collateral involved. The ability for the lender to remotely access the borrower's systems is a big plus. The key is exercising the degree of control necessary to manage and mitigate the risks; the higher the risk, the greater the control needed. To achieve control, lenders need significant management expertise, a thorough understanding of the borrower's business, good reporting systems, and ongoing supervision of the collateral and the relationship. The type of collateral also determines the monitoring frequency. Inventory levels must be monitored more closely than receivables since the quality of receivables changes slower than inventory.
11) Are ABL strategies affected by greater economic instabilities?
Absolutely. ABL is all about liquidity. In an expanding economy companies have an easier time obtaining cash and may be eligible for more traditional financing. As the economy contracts and moneyline banks tighten underwriting standards, companies will have greater liquidity needs to weather the storm at the same time banks are tightening credit. The end result is an increase in the need for ABL. ABL lenders must similarly adopt, but this is where ABL can shine. ABL's flexibility to quickly adjust advance rates and other terms means the customer can still have access to capital when it needs it most. Since the lender is really more concerned with the value of the collateral than the overall profitability of the business, a slump in earning could end up having only a modest effect of the company's ability to borrow.
12) What options are available to a company should they default on a payment?
A default of a payment could be a minor or major event depending on the collateral position. We have worked in an advisory role to several lenders who brought us into payment default situations, not to liquidate the position, but rather to verify the collateral value. When the collateral has been verified and the lender knows it is protected it can then work with the borrower by either providing more liquidity, modifying terms or otherwise liquidating its position, but this is normally a last resort and may actually be instituted by the borrower. Amend and extend applies in the ABL world as much as in the traditional banking world.
13) What key trends do you expect to see over the coming year and in an ideal world what would you like to see implemented or changed?
As the world economy continues to expand liquidity will increase and lenders will need to find ways to deploy that liquidity. New entrants will likely look to ABL thinking it is a good place for incremental yield increasing competition in an already hyper-competitive market. While interest rates may creep up, the impact of such increases should be negligible. Companies may very well refinance out of traditional loans to enjoy the flexibility and relatively low pricing of ABL, or use a combination of debt structures to satisfy their needs. So, what can go wrong? The economy is still fragile and jolts can still have lenders over-reacting, not to mention government intervention in credit policy and overall regulation. However, for the nascent company, liquidity may still be elusive due to stronger underwriting. In other words, lenders will fight tooth and nail to lend to established credits while eschewing those which have been unable or unwilling to take on either traditional or ABL lines.
Excerpts of article from The Suit Magazine.
An Obamacare requirement prohibiting hospitals from "engaging in extraordinary collection practices" may end up being a hard pill for professionals in the medical receivables industry to swallow. So asserts Stacey Schacter, chief executive officer of Vion Receivables Investments, headquartered in Atlanta, GA. Medical receivables are one of his firm's current specialties. Vion purchases all types of assets and debts – good, bad, performing or non-performing – for either collection or reinvestment. "It is a defined term. What that means is hospitals can no longer report certain medical debt to credit bureaus," Schacter explained. This leaves a fairly effective tool sitting unused in the bottom drawer of the collection industry tool box.
Under the Patient Protection and Affordable Care Act, better known as Obamacare, hospitals and other medical facilities are required to "qualify" patients for medical assistance plans. If the patient qualifies but still has an outstanding balance he or she is unable to pay, the hospital cannot turn that amount over for collection. This potential inability represents a significant change in standard collection procedures.
This may also be the catalyst for other relatively natural reactions to changes brought on by Obamacare – the development of new career fields. Even though many hospitals and other medical care facilities already have social workers to guide patients through the financial maze associated with health care, the implementation of additional Obamacare requirements is likely to bring on increased specialization for professionals currently in the field. This, along with potentially larger workloads equals the need for more personnel.
Schacter also sees Obamacare as being the spark for a massive upswing in medical coding jobs, as different and more specific coding requirements become standard operating procedure. The federal law – still struggling toward implementation – marches forward with new coding requirements, by 2015 adding to that the establishment and maintenance of mandatory electronic medical records.
"I certainly am no expert on Obamacare, but the requirement of electronic records, plus the fact it is also requiring new coding procedures means that a lot of medical facilities and hospitals potentially have a major problem on their hands," Schacter explained. Even before Obamacare, Schacter said that medical coding was a challenge.
"Medical professionals already were not very good with the old system," he said. "It is going to take a lot more organization by medical professionals in order to get their reimbursements."
Schacter also anticipates that consumers – medical patients – will experience inaccurate billing due to Obamacare mix-ups. Although he recognizes that his industry may not be perceived as consumer friendly by the general public, he begs to differ on that aspect. Schacter is very active in consumer protection efforts and has taken proactive steps, including offering a sizable library of information aimed at consumer financial education – including several do-it-yourself calculators – on his firm's website.
"We view ourselves as a consumer-friendly firm," Schacter said, noting that he's adding even more consumer-oriented information, such as links to consumer protection agencies. He is also keeping a watchful eye on the activities of the Federal Consumer Financial Protection Bureau created in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The agency, which had its first director in 2012, is still ramping up its involvement at the intersection of the financial industry and the protection of consumer rights.
In 1999, one of his large clients made him an offer Schacter couldn't refuse: to become General Counsel for the company. He jokes that he went over to the "dark side" after being promoted again, this time from the lead attorney position to CEO. Eight years later, the big crash in 2007 happened and it prepared him for what he does now in ways he never expected. After the Wall Street crash, Schacter said that he was fortunate to hook up immediately with a private equity group and begin doing something he always dreamed about: to design and build a company the way he wanted to do it.
"I used what I had learned as an attorney and as an executive to build something unique and beneficial at a particularly opportune time for that sector of the market," Schacter explained. "And that was the start of Vion." Despite the market collapse, the timing couldn't have been better. "We had capital while everybody else was sitting on the sidelines," he said. "That really allowed us to jumpstart the business at a time when liquidity was desperately needed."
Today Schacter works with businesses to free up capital that could be put to a better use if it were not tied up. They don't necessarily have to be distressed – although many are. Often, it isn't the business itself that is challenged, but the type of receivables. The business itself may simply be ill-equipped to handle those accounts.
"Our business is one of acquisition of financial assets," Schacter explained. "We are looking for clients for whom we can provide a higher and better use of their capital," he said. "Many times, assets or liabilities are no longer a strategic fit for a business. We can help."
Atlanta, GA – February 2014. VION Investments (VION) is pleased announce that Adam K. Bowen, VION Manager of Forensic Audit, has been invited by the Association of Certified Fraud Examiners (ACFE) to speak at the 25th Annual Global Fraud Conference in June. The ACFE is the world's largest anti-fraud organization. The Global Fraud Conference is the world's largest anti-fraud event with the purpose of combating fraud and misconduct in today's business environment. Mr. Bowen was invited to speak at this year's conference to provide his perspective on creative fraud execution strategies and holistic anti-fraud programs. Mr. Bowen was invited by the ACFE to speak from among thousands considered.
David Reak, Chief Operating Officer of VION said, "Mr. Bowen has achieved well-deserved prominence among fraud examiners and the world's leading financial institutions alike for his work related to anti-fraud analysis, process management, and controls. His expertise provides VION and its internal and external stakeholders with unparalleled confidence in making critical business decisions. We are pleased to have a professional of Adam's caliber leading our anti-fraud efforts."
Mr. Bowen stated, "It is a true honor to be invited to speak at the world's largest anti-fraud event. The most harmful and dangerous fraud is not the one we detect but instead the ones we don't. We must be three steps ahead of our adversary. Cutting fraud globally strengthens our economy, enabling business expansion and job creation. Understanding the great importance of our work, my fellow fraud examiners and I must—and will—continue our charge to remain vigilant in the battle against fraud. The Global Fraud Conference is a mechanism for us to expand our knowledge and skills. It is a privilege to serve and represent VION, where leading my organization's anti-fraud efforts is not just my passion but also a true pleasure.
Mr. Bowen's session at the Global Fraud Conference will primarily focus on the covert ability to use ordinary financial statement entries in an opposing way to manipulate accounts or fraudulently subjugate financial statements. The presentation is expected to be published following the June event and available as a future white paper download through the VION website.
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