Why Counting Positions Is the Wrong Way to Underwrite

Most people in this market treat the position number as the answer. A second position is fine. A sixth is suspect. An eighth is dead on arrival.

That framework is easy. It is also wrong.

The real question is cashflow.

Every receivable purchased on a business is a daily claim on that business's deposits. When a business has several receivables already on it, each one is another daily claim sitting in line. The question is not how many claims exist. The question is whether the business brings in enough every day to cover all of them, with room to spare.

A $4M business with clean deposits, no bounced days, and three existing positions may have plenty of room left. A $1.5M business with three bounced days last month and one existing position may have none.

The number on the file does not answer this. The bank statements do.

The math is straightforward. Take the average daily deposits. Subtract what the business is already sending out every day. Subtract what the new position would add.

What is left is the cushion. That cushion is the whole underwriting question.

Bounced days in the last sixty matter more than position count. A business that ran negative on any day is telling you it is already stretched. Adding more is the wrong move whether the new position would be a second or a seventh.

A business with steady deposits and no bounced days can carry more, even with several positions already on the books.

The industry standardized on counting positions because it is fast. Reading bank statements is slow. The shortcut won, and that created mispricing in later positions across the whole market.

The cashflow does not care what number sits on the cover sheet.