Part I: The Value of Human Capital in the Factoring Industry
Human capital is an important component of most industries; however, it is the most important element in the Factoring Industry. There is a science to factoring but there is also an art. That is where human capital shows its true value.
Every company has an inventory. In the Factoring, the inventory is cash. We are one of the few industries where the inventory is deployed, and the survival of the company is based on getting it back, with additional fees generated. In short, we lease money. It takes exceptional talent to manage a system dedicated to supplying this precious commodity when needed, and even more to return it to “the shelves” for redeployment in a timely manner.
How, then, can we determine the value of these abilities? Certainly, a dollar figure must be allocated to the employment of our talent. That amount is determined by the individual’s role, the amount of authority they are given, and the tasks they are required to perform. Let’s explore several different positions to give an overview of these costs relative to the market.
The Role That Sales Takes
We will begin with sales. Sales drives revenue, so what special skill set should salespeople possess? Where does their value lie? In our industry, sales are a completely unique process from most others. For example, in leasing, almost every other company has the product on hand, then starts to utilize cold calling, direct mail, and other forms of business development in order to obtain clients. In Factoring, our product is only utilized when the need arises and the client can’t obtain money from other, less expensive sources. The most effective marketing technique to obtain leads, centers on gathering numerous referral sources. These sources can identify troubled companies in their time of need and deliver those leads to the BDOs. A skilled BDO will build a rolodex of referral sources that are loyal to him or her and to the flag they are flying. Of course, the same can be said for the companies themselves. Many follow the exact same procedure, hence the broker network that has developed in our industry. Other methods can be utilized, such as mentioned above, but one of the greatest values of a BDO, aside from all the other, normal skill sets you would want to see in a salesperson, is their referral base.
So, what is a BDO with a strong referral base worth monetarily? Market compensation plans for BDOs have a wide range for both bases and commissions. Bases generally range from 70k-120k depending on the product line, amount of business generated, time in the industry, etc. Commission plans typically run from 5%-9% of fees generated. Most of these are for the life of the deal. In addition, some companies are innovative enough to have a sliding scale on commissions. This is a payment system where the percentage of sales varies based on the amount of sales. “Amount” meaning either the number of deals booked or the total dollar value of their cumulative sales. A sliding scale offers incentive for salespeople to sell service not just rates. This method has proven to be very effective.
The Credit Side of the Equation
On the credit/operations side, there are several key positions, which can be split between underwriting (before the deal is booked) and account management (after the deal has been booked). In ABL, underwriting is a totally different function from senior management; however, that is not the case in Factoring. As a result, talent in underwriting is very scarce in the Factoring Industry, simply because so many of the owners and sr. management of the companies have assumed the role. Due to the scarcity of the talent, individuals who have mastered this role are in high demand. This is a crucial role, in which the very best ask the question, ‘How can I structure this agreement to protect the company’s asset and still book the deal?’ Those less talented, develop the habit of saying ‘no’ since they are without the ability to manipulate the structure of the agreement to their advantage. That is where the art versus science component is very apparent. As in sales, the cost of these individuals varies greatly. It can be anywhere from 60k-140k throughout the industry. This range depends primarily on the size of the company, the type of deals they book, the location, etc.
Portfolio management and account executives are the first line of defense for Factoring companies. Once again, we find that in smaller companies, owners and managers preform these duties to some degree. Although beyond a certain point, even they have to find a special individual(s) who can take on these very important roles. These individuals must be courteous and friendly to the clients, yet protect the company’s assets by ensuring that any red flags on the account are handled immediately. One wrong turn can send you down the road to write-offs and work-outs, which is the destroyer of profit. Heavy-handed individuals in these positions will run the clients off in droves and destroy profits. A delicate balance must be found. An individual with the right personality should be able to recognize any problems that arise and address these issues in a professional, friendly manner, while remaining firm enough to protect the company’s interests. The cream of the crop will be able to detect early warning signs and handle any issues well before they grow into major catastrophes. Naturally, this type of talent also carries various compensation requirements depending, again, on knowledge and ability. An experienced account executive is usually in the base salary range of 45k-85k. While an experienced portfolio manager, who manages the account executives and sometimes the largest accounts, is usually in the base salary range of 80k-140k. This number depends on the size of the portfolio, the number of account executives managed, the size of deals, the length of time at a company, etc.
Great talent is the key to success in the Factoring Industry. If you think it’s too expensive to find the right credit/operations person, then please know it will cost you a lot more to have the wrong person managing your accounts. Likewise, if you think that good salespeople are too expensive, consider what happens when your portfolio starts to run off and you have no new business. A high producer is certainly worth the money expended to keep the deals coming in the door. Talent is your most valuable asset and should be compensated fairly.