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As the economy stumbles, the business landscape is fertile for factoring companies to thrive.
“The factoring industry is as busy as it’s ever been, with more risk in the market than there’s been in a while,” said Don Morrison, executive vice president of commercial services for GMAC Financial Services. “There are more opportunities with more clients in traditional asset-based loan situations looking to get into factoring. Some are returning to a factoring model.”
Factors buy accounts receivable and by selling its accounts, a vendor can create a more predictable business cost and lessen exposure to credit risk. The recent spate of retailers filing for Chapter 11 bankruptcy protection, such as Mervyns, Goody’s, Steve & Barry’s and Boscov’s, has helped fuel the trend.
“We will literally double the size of our business on the West Coast this year, and show a very strong rate of growth overall as a company,” said Kevin Sullivan, executive vice president and western region manager at Wells Fargo Trade Capital. “In an environment such as this, companies begin to appreciate the level of flexibility and risk management that a factor can provide.”
The tightening credit market, propelled by the home mortgage meltdown and other elements, is another force driving the renewed appeal of factoring.
“We’re finding it very strong because the conventional lending market isn’t there; people are looking for a port in the storm,” said Miles Stuchin, president of Access Capital Inc., speaking of the traditional sources of credit for vendors. “There are banks that are capital restrained [and] hedge funds [are] pulling back. I’m seeing less non-institutional options available. People are skittish.”
John LaLota, president of Sterling Factors Corp., said: “While most inquiries have been for credit protection this year, more recently there has been an increase in requests for financing, partly due to a tightening in the credit markets, as banks and finance companies struggle to deal with the fallout of the sub-prime mortgage crisis.”
He added, “Most banks do not feel comfortable lending to the apparel industry, especially during difficult times. This has created opportunities for factors.”
Poor retail performance and credit aren’t the only elements driving the factoring business. Overall conditions — including a weak dollar and increased pricing in sourcing product — have made for what one executive called a “perfect storm” for companies to make use of his firm’s services.
“We’ve seen larger companies that would have never chosen factoring before coming to us for receivables management and for credit protection,” said J. Michael Stanley, managing director at Rosenthal & Rosenthal. He said traditionally, there are two types of companies making use of factoring: those looking to grow a business and in need of cash flow, and those in rougher waters and in need of restructuring.
He added that in the current climate, even companies with more short-term troubles are turning to factoring. “We’re seeing now a third class, a stable customer that incurred a loss or a challenging period,” Stanley said.
Though the current circumstance can be advantageous for factors, it is not without its risk.
“We can actively grow in this environment selling credit protection, selling cautiously,” said Andrew Tananbaum, president and chief executive officer of Capital Business Credit. “Generally speaking, on the lending side, we have to be very cautious lending money to our clients in this environment.”
Sullivan at Wells Fargo said that the challenge in factoring has always been to balance a client’s needs with market realities. He added that in a downturn, the industry as a whole readjusts.
“What we’ll see is a repricing of risk to better reflect today’s conditions,” Sullivan said, adding that in better economic times, “The competitive nature of our marketplace allowed deals to be done at a pricing situation that might not have made sense.”
Marc Heller at CIT said his firm, one of the largest factors in the U.S., is paying close attention to its clients’ supply chain and accounts.
“If they’re selling to every poor-performing retailer, then they probably don’t have much of a chance,” he said. “Sourcing is critical because pricing at retail is so important. You’ve got to bring it in timely and with quality.” Heller added that these are standards the firm abides by regardless of the economic conditions.
Other factoring executives also said that, despite the downturn, their companies had not changed methods for evaluating potential clients and their accounts. They remain focused on indicators such as risk management policies, business models and leadership.
“In good times or bad, companies face operating challenges; there are always issues,” said Access Capital’s Stuchin. “Our single strongest form of risk mitigation is not losing money. We do business with people who pay….So long as you’re dealing with people who do that, the wind is at your back.”
He added that with the demand for factoring services high, his firm can choose to work with less-risky clients: “Pragmatically, we’re seeing companies that are a little larger, a little more seasoned. When you’re the most attractive girl at the dance, you wind up dancing with more attractive partners. It hasn’t been quiet lately.”
New business isn’t the only thing keeping factors busy. Many report having to forge a closer relationship with clients and their accounts. What was once an open line of credit might now need order-by-order oversight.
“This is one of the more severe downturns we’ve seen,” said GMAC’s Morrison. “This is a time when factors need to be more creative with our clients [to] form more of a partnership….It’s very important to provide continuous coverage with clients, but [also] to avoid taking losses. The only way to do that is to be close with and more in touch with our clients.”
Gary Wassner, president of Hildun Corp., a smaller firm with a majority of clients in the $2 million to $5 million sales range, said the accounts his company has to collect on have managed payment.
“They’re not going to pay us incredibly late,” he said. “We’ve had to work with some of the weaker stores. Balance sheets are weaker. We’re trying to make it easier for our clients to do business in difficult times. Credit is tight.”
Wassner said even with the retail slowdown, there are some vendors still performing well. He pointed to the European luxury houses as an example: “That end of the market is always the last to feel it. We know that the luxury end of the market is stable.”
He also noted, in between his clients’ shows at New York Fashion Week, that there is still a need for factoring as a growth instrument for new and smaller designers. “There’s always new talent, the hot new thing in the design world,” Wassner said.