Debtor Silence: Economics, Law, or Operations?

Jefferies rang some debtors this month to check the invoices behind its Point Bonita fund this quarter, and was told, Bloomberg reported, that a bunch of them weren't genuine. The debtors had no contract with Jefferies and no duty to answer. Someone there chose to be helpful, and that was what uncovered the fraud.

Imagine it's your book. You funded the invoice, emailed for verification, called, nothing came back. You tried again. Nothing. Before choosing what to do next, decide if this is an economics problem, a legal problem, or an operations problem. Which one you pick decides how you try to fix it.

Economics is where we look first. One of the largest public factors in the country spent $17.6m running its factoring segment last quarter and set aside only $1.1m for credit losses. Servicing the book costs sixteen times what the credit risk in it does, and chasing debtors is a servicing cost.

This only explains the volume of silence. Double the spend on chasing and you get more attempts, not necessarily more answers. There is no price tag on chasing that means a stranger has to reply to you.

What does the law say? There is no obligation on a commercial buyer to answer a lender's question about an invoice. UCC 9-406 literally gives power the other way - subsection (c) lets the debtor demand reasonable proof of assignment from the lender, and until you show it they can keep paying your client and not responding to you.

Where the law does address silence, it picks a clear winner. Arizona deems a construction progress billing approved fourteen days after the owner receives it, absent of written reasons. So in some specific contexts, it does exist, just not in a general case.

We had a team member read a complete recourse factoring agreement clause by clause last week - the agreement gives a lender the power to "contact Account Debtors at any time to verify and/or collect". Unlimited authority, but it's granted by the party who isn't on the other end of the call… Clients sign an agreement, backed by a guarantor, both of which are at the mercy of a debtors AP team.

Auditors figured out non-response too. When the PCAOB rewrote its confirmation standard it let auditors skip confirming receivables where prior experience shows the responses don't come - non-response got written into the standard as an expected condition, with a procedure built around it. Receivables finance copied that confirmation request - but it never copied what to do when nothing comes back.

Which leaves operations! Where much of the silence can be self-inflicted. An assigned invoice often isn't visible in the debtor's AP system for ten to fifteen days, so the first chase was for something the recipient couldn't see anyway.

The best evidence is the kind you don't have to ask for. A debtor of any size has usually handed its factor a standing view-only login to it's AP portal, and any remittance detail and signed supporting documents sit inside it. In goods distribution, shipment tracking can be checked without contacting the debtor at all. Worth knowing whether the access clause you hold has been provisioned for every debtor - a contractual right isn't a live data feed until someone (or some thing) watches it 24/7.

The rest is contact that doesn't need a person behind it, timed to when the invoices exist in their ledger, with the proof attached before it is even requested. Following up with voice agents which can get you better email addresses to contact, or hold a real conversation that resolves a dispute and writes the result back into the FMS.

Of course, none of this has created a duty for the debtor to answer. But a lot of cool tech is emerging that can up your odds of a debtor responding without lifting a finger. For many lender portfolios, we're talking $10m+ of free wins.