Net-60 from the servicer while dump fees are due today, how much of that receivable is real

Question

Here is a working capital structure worth poking holes in, because the shape of the risk is unfamiliar to most people coming from property. Numbers as typically presented: about $40,000 a month billed, roughly 70 percent through one national field services company and the rest direct to two local investors. Stated collection is 45 to 70 days on the servicer side and under 10 days on the direct work. The owner wants a $60,000 revolver against receivables. Payroll and disposal run about $26,000 a month and both are effectively cash on the spot. The hard part is how much of that receivable is actually collectible. Invoices get reduced on review, and there are chargebacks against later work. If a rejected invoice survives as a deduction from the next month's payment instead of dying outright, then the collateral is a moving target and an advance rate of 80 percent could be well over the real value. What advance rate does this kind of paper support, and what is the failure mode that's easy to miss?

Rena Expert · Accepted Answer

The deduction mechanism you described is the main thing to underwrite. On servicer and field services work an invoice can be reduced or reversed after payment when a photo audit or an investor review finds the documented volume didn't support the billed amount, and the recovery usually comes as an offset against the next remittance rather than as a demand for a refund. So the receivable isn't a fixed claim you can count. It's a net position against a counterparty that holds the pen on both sides.

Practical effect on your numbers: at $40,000 a month with 70 percent on 45 to 70 day terms, days sales outstanding blends to somewhere near 45. That's roughly $60,000 of receivables outstanding at any moment against $26,000 of monthly cash out. Your $60,000 line is sized to the whole book, which means an 80 percent advance rate is really advancing close to full value on the concentrated piece. If audit deductions run even 5 to 8 percent of billings you're funding losses at par.

So look at his last twelve months of remittance statements, not his invoices. The statements show the deductions. Anything above single digit deduction rates says his photo documentation is weak and that won't fix itself.

Concentration is the other exposure. One field services company at 70 percent of billings can drop him from the vendor list for a missed due date, and every open receivable is then sitting with a party that has no further reason to hurry. Ask what happens to work in progress on removal.

Collateral value is close to zero. A dump trailer and cleaning equipment liquidate for very little, and mechanics lien rights on this kind of work are limited and vary by state, so don't assume the property itself backs anything. Whether he can lien at all is a question for counsel in his state.

Factoring on similar paper commonly runs a few percent per 30 days, which is your competition and your pricing reference.

nicole_adeyemi · Answer

Slightly sideways to your question, but disposal cost is not uniform and it moves. In rural areas a transfer station can raise tonnage rates twice in a year and start refusing mixed loads that carry any construction debris. A crew whose model assumes a fixed dump cost per yard can lose a chunk of margin without a single client changing anything.

brandonlee36 · Answer

Paying a turn cleaner within three days buys first call every time, including on a Saturday when a tenant has left a fridge full of food. It costs the owner nothing and it is the reason a unit never sits waiting on a clean. Sable, the 30 percent of his book that is direct investor work is probably his best business by a wide margin.

kevin_lombard · Answer

Why can't the crew just ask for a deposit up front? That seems like it would solve the whole problem.

devon_pierce · Answer

Juniper, on the servicer side you cannot. The work order arrives already priced against an allowable schedule and the payment terms are theirs, take it or come off the list. Direct to an investor you absolutely can ask, and an investor hiring a crew for the first time will commonly agree to half up front.

dpatel_re · Answer

Model 8 percent deductions and a 60 day DSO and see if it still clears. Sable, at those inputs an advance rate above 65 percent on the field services receivables looks aggressive, and the direct invoices belong in a separate pool at a higher rate, since they turn in ten days and the counterparties are named individuals you can actually call.

jessreyes12 · Answer

What exactly is a chargeback here? I've only heard the word for credit cards. Is it the servicer saying the job was done badly, or saying the paperwork was bad on a job that was done fine?

dmitri_248 · Answer

Compass, mostly the second one. Which is why the vendor agreement is where sable should be looking. The clauses to read are the setoff right, the audit lookback window, and whether the company can recover against unrelated invoices. Lookbacks are sometimes written broadly enough that work paid long ago is still open, and if that is in this agreement then the receivable balance on the balance sheet isn't the exposure at all.

renee_dubois · Answer

A common pattern with turn vendors is that they stop taking servicer assignments entirely after floating one for two months. The math from their side is simple: six apartment cleans at $200 that pay on Friday beat one preservation job that pays in sixty days. That churn is part of what sable is lending into, since the crew's competition for its own labor is the fast-paying work.

jordan_ellis2 · Answer

Reading all of this I'm less sure the $40,000 number means anything on its own. If 70 percent of it can be adjusted after the fact and the good 30 percent is the part that doesn't need financing, then what's actually being funded is the slow half. Which might still be fine, I just can't tell from the outside.

Net-60 from the servicer while dump fees are due today, how much of that receivable is real

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