NEW YORK — The basic premise of factoring, lending money against a company's receivables, has been around for centuries. But despite a rapidly changing global economy, the business of factoring hasn't changed all that much. In fact, the industry's genesis can be traced to a prior era of global economic expansion.
"It's almost like 'Back to the Future,'" explained Jon Lucas, senior vice president and Northeast regional manager, commercial services, at New York-based CIT. "When factoring first got started, it was all about England looking to ship fabric and other goods into the United States. Now it's not England anymore, it's Asia shipping into Europe and the United States."
The factoring industry, Lucas said, has not fundamentally changed, because throughout its history, this unique area of the commercial finance world has played a key role in trade finance. Some would even argue that it played a critical role in the development of the U.S. apparel industry.
Now that manufacturing and the sourcing of goods overseas is changing the dynamics of business, factoring is once again emerging as an important financial service.
"[The factoring industry] has gone full circle ... It is a truly international business, and getting more so all the time," said Sidney Rutberg, contributing editor for the Commercial Finance Association's Secured Lender magazine and author of a 1994 book that looks at factoring and related lending institutions titled, "The History of Asset-Based Lending." Rutberg also served as the financial editor for WWD and Fairchild Publications.
Some historical accounts of the factoring industry date the origin of the industry as far back as 4,000 years ago during the reign of Hammurabi, a Mesopotamian king. Other historical accounts cite the Romans, who enlisted commissioned agents to facilitate the transportation and sale of goods about 2,000 years ago.
"From the earliest days of modern civilization, suppliers have had to contend with the conflict of time and money. As the ability to trade over greater distances evolved, intermediaries as agents became necessary to expedite transactions," said Howard Moore, senior vice president, IDB Bank, based in New York.
The industry's rise and evolution in the U.S. is more easily traceable through its ties to the textile industry in the 19th and 20th centuries. Factoring as it is known today most directly evolved out of selling agents for European textile mills in the 19th century. Factors established themselves as agents facilitating the sale of European textiles here and the shipping of domestic raw goods overseas. With the arrival of the Industrial Revolution in the last quarter of the 19th century, which fueled unprecedented population growth and industrialization, the role of factors became increasingly important.During this period of rapid development, companies were particularly interested in determining the creditworthiness of their clients. What evolved was recourse (or nonrecourse) factoring, which is common today. The stable of services offered by factors at this point in its history included credit guarantees, cash loans, collections and document preparation for their clients. The credit guarantee function would gain in importance over time, sources in the industry said. Following the initial growth of the 19th-century manufacturing in the U.S., factoring expanded in the early part of the 20th century to include a number of other industries including apparel, accessories, furniture and floor covering. But even as the factors grew their client portfolios, they remained strongly connected to the textiles trade.
Following the two World Wars, consumerism emerged as a powerful economic force. And as a result, the factoring industry evolved, too. The period from WWII until the late Seventies was a boom time for factors, and is considered a "golden era" in the industry, said Moore.
"A dramatic change for factors occurred after World War II with the rapid growth of a middle-class consumer society in the U.S. Rapidly increasing consumer demand for textiles and furniture increased the need for working capital and credit protection for manufacturers," Moore said.
Demand in the retail sector grew, but selling to retail establishments at the time meant smaller invoice sizes combined with more customers as well as more invoices.
During the Seventies, a number of trends began to emerge that would further alter business. One of the most significant trends was increased consolidation at retail and on the vendor side of business. There were early indications that manufacturing industries were looking to move overseas.
Between the the Eighties and mid-Nineties, the factoring industry contracted severely. At one point, there were three companies that controlled 50 percent of the factoring market. The contraction of the factoring industry was primarily fueled by bank acquisitions of companies and by consolidation among the factors themselves. There was a period when banks looking to get into a wider range of financial services were buying factors, but many have since divested those businesses. Still, some factoring companies, notably CIT and Sterling Factors, remain tied to financial institutions today.CIT also has deep ties to the retail side of the industry. An interesting historical side note: CIT was founded by an ex-May Department Stores executive named Henry Ittleson with $100,000 in seed money from company founder David May, according to Rutberg's book. The company Ittleson formed, Commercial Credit and Investment Co., after a few iterations, became CIT, which has been the largest factoring company in the industry since the Thirties.
In recent decades, as the textile and apparel industries increasingly moved overseas, factoring has experienced a bit of déjà vu.
"The demands of a global economy have once again turned factors toward reaching across the oceans to facilitate trade. Factors provide timesaving expertise in trade finance and once again factors finance individual import transactions providing cross-border credit protection via relationships with international factors," said Moore.
As companies realized that the highest revenue and profits could be made on the sales, marketing and finance sides of industry, increasing numbers of domestic manufacturers, from yarn and fabric makers to raw material suppliers, shifted overseas to lower-cost countries, Lucas said. The trend started in the Seventies, Lucas said, but accelerated in the Nineties. Today, the global nature of the apparel industry has touched many aspects of the factoring world.
Sourcing for products is the biggest difference in the industry today, said J. Michael Stanley, executive vice president, Rosenthal & Rosenthal Inc., New York. Countries such as Cambodia, Sri Lanka, Vietnam, Pakistan and a host of others have eclipsed U.S. textile and apparel manufacturing.
Those changes have impacted everything from the services factors offer and technology requirements to the location of their offices. John La Lota, executive vice president, Sterling Factors Corp., said he recalls a time when Seventh Avenue and the garment industry in New York were booming, and the California market was very small. Now, he pointed out, the California market is huge on the apparel side because of its proximity to Asia.
"Three weeks ago at midnight, on a Friday, I was sending e-mails back and forth to China because a client needed to get goods shipped to them," La Lota said.
The services offered by factors also have changed. Credit protection services have been and continue to be central for factors, but in recent years, factors have had to broaden the services they offer to stay relevant to their clients' businesses."If you go back to the pre-Civil War days, the factor would do everything from soup to nuts. Now, between the soup and the nuts there are a lot of specialized companies that are engaged in transportation and logistics management, companies have taken sales and marketing in-house, perhaps the bookkeeping, perhaps some of the other things that a factor once did, which leaves the factor to be focused on credit protection and lending activities," said Lucas.
Factors now lend against more than just a company's receivables, sources said. They are lending further into the balance sheet in an effort to stay competitive in the marketplace. It's not unusual for factors to lend against inventory, property, plant and equipment, or intellectual property, Lucas said.
Being flexible and creative to find new ways of financing the apparel business is important, whether that entails lending against intellectual property, which was almost unheard of, or lending against licensing streams and trademarks, said Stanley. "If we're not accommodating our client, somebody down the block will."
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