By Dan Burrows

NEW YORK — Factors, functioning in their customary role as the fashion industry’s platinum card, are hopeful that a slight easing of inventory constraints by stores will help them in the second half.

The first half of fiscal 2002 was a time of almost unparalleled uncertainty for the industry, as the Kmart bankruptcy, corporate accounting scandals and geopolitical strife conspired to create an unstable economic environment where doing business as a factor was perhaps as difficult as it has been in decades.

On the other hand, post-Sept. 11 inventory reductions have pretty much run their course, and now factors have an opportunity to grow their businesses as stores replenish their stocks. Now that the very challenging first six months of the year are past, most major players are making do or doing well, even if they don’t see a significant upsurge in sales taking place until the first half of 2003.

As Barry Essig, president of refactor Spectrum Financial, said, "I’ve been doing this for 40 years and this is by far the most unusual performance of the economy I’ve ever experienced."

That said, Spectrum started slowly but did pick up steam over each month of the first half of the year. From January through March, business was soft, said Essig. "But April, May and June were very good," he said. "We’ve had much stronger volume from existing clients as well as some new business. But it’s difficult to say how much of that is inventory replacement. As for the second half, there’s still big questions. Some of our clients are optimistic and some are very uncertain."

In the second half, at least, there will be less uncertainty about the biggest player in the factoring business, CIT Group, which was spun off from troubled parent Tyco International in a $4.6 billion initial public offering at the beginning of this month. Tyco spent $9.5 billion to buy CIT in 2001. While the IPO failed to deliver to Tyco the amount of cash it was hoping for, the spinning off of CIT reassured manufacturers who were concerned that Tyco’s accounting problems might spill over and handicap CIT, the nation’s largest and most diverse financial services company.For different reasons, Rosenthal & Rosenthal, a New York-based factor, also had a rough first half. "Business was very soft and essentially flat with last year," said executive vice president Jerry Sandak. "I think it will get better in the second half, but only as a result of our being aggressive rather than our clients improving their businesses. The way things are going in the soft goods industry, we have to add new business because if our clients aren’t doing business, we’re not doing business."

As for the the immediate future of the U.S. economy, Sandak is not bullish at all. "I’m not looking for sales increases until the first half of 2003," he said.

Capital Factors also reported a sluggish start to the year, but does expect some improvement in the near term. "Apparel has been somewhat slow with our clients playing it pretty close to the vest," said senior vice president and regional manager Scott MacMillan. "People felt guilty about shopping with job uncertainty and so we’re off a little bit but not too significantly in volume. In the first half our clients didn’t get a lot of reorders because retailers didn’t see traffic in their stores and they were careful with inventory.

"But for the second half, we expect things to get better. Our client orders are up and getting better. And on our business side things are looking pretty good and we’re getting more business from banks who don’t want to take the risks."

As for the future performance of the economy as a whole, MacMillan essentially said anyone’s guess is as good as his: "You see what the stock market is doing daily. The attacks in Israel make people nervous. There is just a lot of uncertainty. There have been a lot of layoffs, and people worried about their jobs or their overtime just don’t spend."

HSBC Bank USA also reports a slowdown in business activity due to what might be termed the usual suspects. "Our business is basically on par with last year," said executive vice president Marvin Rabinowitz. "Loan activity has remained stagnant because our customer base is managing its inventory better than ever before due to concern after Sept. 11. So they’ve maintained a very cautious approach. From a portfolio point of view we are in excellent shape. Hopefully the second half will pick up since inventories are down and balance sheets are clean."Tom Pizzo, president of Century Business Credit, cited an aggressive approach to customer service and greater emphasis on a wider range of services for what he described as "excellent" business conditions: "We’ve had a very good year of growth and have added new clients."

Century this year has leaned more heavily on trade finance and letters of credit, businesses that have been shaken loose from the aftermath of the consolidation in the factoring business that occurred over the past two years and has now settled down. As for the future, Pizzo sees business continuing to pick up but with the economy in such a state of flux, it’s impossible to say by how much with any real certainty.

General Electric’s factoring business was also very robust in the first half. "It has been great," said senior vice president of marketing Jay Desmarteau. "We have had good new business volume and our pipeline is healthy. The uncertainty has actually helped our business side because customers want credit information and analysis on whom they sell to as well as credit protection. That’s something we have the resources to really excel at."

The confusing and contradictory state of affairs is demonstrated in the first-half performance of New York-based Milberg Factors, whose success came as something of a shock. "Surprisingly, our business was up 15 to 20 percent in the first half, so we are very pleased. We have greater volume and picked up new clients who were dissatisfied with our larger competitors. At the same time some of our larger existing clients are actually doing quite well."

On the other hand, Milberg admits that the Kmart bankruptcy filing was the single worst event of the first half and "we certainly took our licks on that," he said. But even so, with the current course going well and the addition of new clients who have never factored before, Milberg is "incredibly optimistic" and "very bullish" about his company’s prospects in the second half.

However, Milberg said the same cannot be said about the anticipated performance of the larger U.S. economy.

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