NEW YORK — Growth is returning to the factoring industry as firms offer more services and pitch to a broader range of clients to compensate for a difficult retail landscape.
So far, 2003 has been pretty good for factors. With easy comparisons against brutal year-ago numbers, and uncertainty and instability causing banks to tighten up their lending, new clients are being driven to explore the variety of services factors offer, and so volume, for the most part, is up.
That’s the good news. The bad news is that volume isn’t being driven by an upsurge in retail sales, which remain sluggish with little relief in sight. While factors are thankful they can thrive in a down economy, they would much rather their existing clients would do more business. After all, as many of them say, who needs the risk?
That said, the first quarter has been a huge relief for many factors. Functioning in their customary role as the fashion industry’s platinum card, factors found fiscal 2002 to be 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.
The quick prosecution of the war in Iraq, the lack of new terrorist activity and the relative quiet on the retail bankruptcy front have settled things down considerably from a year ago.
Moreover, factors now offer more products, and with the Wal-Mart effect pressuring all vendors to become ever more efficient, the outsourcing services factors can provide can be an effective way to cut fixed costs.
"Over the long term, periods of uncertainty and instability can be good for the factoring business," said John Heffer, president of HSBC Business Credit USA. "Factoring offers efficiencies and flexibilities. It fits very well into the equation of companies becoming more efficient because they can outsource their receivables and credit functions. This way, they don’t have a fixed cost. Factoring is a variable expense."
Heffer said that excluding the Kmart bankruptcy in year-over-year periods, HSBC’s volume was good last year and has increased this year as the company has picked up market share. Given the bankruptcy potential in the market place, the firm is picking up new clients who are considering using a factor for the first time. Another aspect that makes HSBC’s Business Credit services attractive to new clients is experience in doing business in a soft economy."This is a very fluid economy and world situation," said Heffer. "I have no ability to project the future of retail sales or the economy. But an advantage we can give the client is that we have been here before. We’ve been there when times are good and we’ve been there when times are bad."
Another major player, General Electric’s factoring business, is also doing well by picking up factoring virgins, though not as many as the company wants.
"The first quarter was not exactly where we would have liked it," said senior vice president of marketing Jay Desmarteau. "But we’re pretty happy with where we are. We’ve signed new clients in the double digits. When times are tough, and you have a traditional client base, you have to go out and get new clients."
GE’s advantage, said Desmarteau, is that with economic uncertainty being so great, it is beneficial to vendors to have less risk and a stable lender. A large, well-established company like GE can bring stability and protection to its clients, he noted.
"GE is used to doing very large transactions," he said. "Some of our loan sizes are north of half a million dollars."
Desmarteau was as reluctant as Heffer to make predictions about the future of retail sales or the economy.
"It’s just too soon to tell," said Desmarteau. "I don’t see too many economic metrics slipping, it’s just that everybody seems so tentative."
Saul Langer, president of Israel Discount Bank’s factoring unit, sees retail sales as the key to the woebegone economy.
"We have a retail-driven economy," he said. "When retail sales are down, the economy is down. So far this year, sales are terrible. I hope I’m not reading the tea leaves, but I happen to think the economy is gaining ground, so I am, as they say, cautiously optimistic.
"On the other hand, if we could predict the future, we wouldn’t be sitting here. We’d be on the beach smoking cigars," he added with a laugh.Langer said IDB’s business is doing "great," driven by aggressively courting clients who can’t get loans from banks on favorable terms, or even at all.
"IDB’s banking business hasn’t tightened up, but in general, when the banking business does, as an industry, people come to us."
Like the major players, smaller factoring operations are picking up volume on instability and uncertainty, but, like everyone else, they are working harder than ever to grow.
"Volume is up substantially, but that’s compared with last year, which was poor," said senior executive vice president Jerry Sandak of Rosenthal & Rosenthal. "Like every business, we feel that we are having to run harder and faster to achieve the results that we want. Competition is keen, but we don’t see any major insolvencies on the horizon. There are still a number of chains that are not doing well and we insure against loss. We check credit and, don’t forget, we are experts at collecting."
Sandak points out that there are great advantages to being small and nimble in this economic climate, as his firm not only can give specialized, tailor-made service to clients, but can move with agility as events change.
"We sell our strengths," said Sandak. "We’re still small enough that we can react very quickly. We don’t have to have a committee meeting to make a decision and get back to you three days later. We can make decisions almost immediately."
As for his prognosis for the remainder of the fiscal year, Sandak said that when times are difficult, "you can’t force the issue, you just have to go with the flow.
"Until employment picks up, gas prices come down, the stock market becomes rejuvenated, people aren’t going to spend," he said. "The economy still stinks, so people are going to husband their resources."
Another important factor, Spectrum Financial, also had a strong first quarter, with volume up about 12 percent, said president Barry Essig, but he noted that this came not only from new business, but from clients outside the apparel industry."Our volume with existing clients has been essentially flat," said Essig. "A lot of our new business has never used a factor before. Apparel is still the biggest part of our portfolio, but it’s getting smaller and smaller because of consolidation in the retailing and manufacturing industries. It’s true for us, and I suspect for the factoring business in general, that service industries are becoming a bigger part of our portfolio."
Essig said that non-soft goods, consumer products and specialty-food companies are coming to factoring primarily for two reasons: credit protection and the leverage factoring can provide to support the cash flow that banks won’t.
Another aspect of factoring that is attracting new clients is the variety of services factors now provide that allow companies to outsource often costly business functions. No longer just straight purchasers of accounts receivable, Essig points out that factors now function as credit departments, invoice verification services, accounts receivable record-keepers, collections specialists, financial data processing and reporting departments, and international credit services and collections agents, an increasingly important segment in today’s more intertwined global marketplace.
As Essig wrote in the trade publication The Secured Lender: "Smart business owners and managers are seeing the fresh face of factoring and taking advantage of this old service. Indeed, it seems that the ugly duckling has finally transformed into a swan."
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