NEW YORK — The seemingly eternal optimism of the factoring community is being tested in an autumn of tempered expectations about apparel that are leading these firms to search elsewhere for growth.

While industry volume appears to be growing again, it is doing so in the single- to low-double-digit range, and factors are working harder than ever to eke out even those gains. Indeed, were it not for the acquisition of new accounts, many of which fall outside the traditional base of apparel and textile manufacturing, some factors would be struggling to produce any volume increases at all. While factors are thankful they can survive in a down economy, they would much rather their existing clients do more business. After all, as many of them say, who needs the risk?

Moreover, factors find that they have to offer more services and pitch to a broader range of clients to compensate for the continuing difficult retail landscape where volume isn’t being driven by an upsurge in retail sales, which are still sluggish at best.

At the end of the first quarter, many factors felt that, if nothing else, 2003 would be comparatively successful since the preceding year was so difficult. After all, 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.

But now, nearly three-quarters through 2003, the economy continues to send mixed messages. Second-quarter retail sales gains resulted largely from promotional selling, not on any great new demand for apparel. Meanwhile, the major market indices may be hitting highs they haven’t seen in more than a year, but the so-called “jobless recovery” does not bode well for a substantial uptick in sales anytime soon, the industry players say.

“Unemployment scares the hell out of me, and I don’t think the tax abatements are going to have the positive impact on spending that has been touted,” said senior executive vice president Jerry Sandak of Rosenthal & Rosenthal. “What I see down the road is not too wonderful. Through the first eight months of the year, I’d say our volume is up 5 to 8 percent, which is not the end of the world, but I am seeing our business as a reflection of the economy. Our business is highly associated with soft goods, which are a laggard, not a leader, of the economy. Looking ahead, on a scale of one to 10, I’d say the prospects for the economy are about a three or a four. Of course, the smart businessman will muddle through, and eventually things will turn around. They always do.”There are some benefits to economic uncertainty for factors, however, and that is because they can create more demand for their services. Sandak and other factors have found that volume gains have been predicated almost entirely on picking up new clients. Considering the elusive nature of sales increases in recent seasons, that’s hardly surprising.

In Rosenthal’s case, new business has come from mostly within traditional channels, which is unusual, with one source of new business stemming from continuing retailer pressure on suppliers to also function as the retailer’s warehouse.

“And, of course, they need money to carry that inventory,” Sandak said.

Spectrum Financial also has seen business ebb and flow over the course of the year and has found its growth, like most factors, outside the traditional industry.

“We had a very good first five months and then we saw a softening in our volume in the summer,” said president Barry Essig. “Now we’re picking up again. We think we’ll be up about 5 to 10 percent by the end of the year. And that is driven by new clients, mostly outside the textile and apparel industry. Apparel still represents the single largest industry in our portfolio, but it is becoming a smaller and smaller part of it. We’re looking at other industries because that’s where the growth is. The U.S. is more and more a service economy.”

New clients are critical, said Essig, because among Spectrum’s existing clients, for the most part, results this year have been down or flat.

“And results for those clients have been very confusing and mixed,” said Essig. “I can’t find any trend based on price points or product category in terms of what is doing well.”

New business has driven similar volume gains at Sterling Factors, where concern over the relentlessly difficult retail environment has created interest in factoring from manufacturers and especially offshore exporters who are unfamiliar with the business landscape, said president Stanley Officina.

“Our volume is probably ahead 10 percent over last year,” said Officina. “We’re lucky to be in such good shape, and so far I’d say we’re probably pretty optimistic about the rest of the year. We had a very good show at MAGIC. We don’t take a booth; we walk the floors, introduce ourselves and talk with existing and potential clients. It was unusual that people were as receptive to us as they were this year.”Officina said the response was twofold: Manufacturers who have been holding their own paper have become so addled by retail’s continuing weakness that they find they must turn to factors, and South American and Asian exporters who require industry expertise and experience.

Of the existing clients who are doing comparatively well, Officina said he has seen some strength in women’s sportswear, especially tops, and men’s structured apparel. However, most extant clients, Officina said, “are faced with the same problems they’ve had all along,” which include ever-mounting margin pressure from retailers, which makes inventory replenishment less profitable, and chargebacks.

“Inventory clearance is a good thing if retailers have finally really cleaned house,” said Officina. “Perhaps they will finally be less abusive towards vendors. First-price selling doesn’t really exist anymore. And while there may be some benefit to vendors from clean inventories, unfortunately retailers have made chargebacks a profit center.”

On a more promising note, high above the trenches where the factors toil, one recent major industry report showed renewed signs of life in the credit business. For the month of August, the National Association of Credit Manager’s Index improved 40 basis points over the previous month’s reading. Even better, the manufacturing sector drove the overall gain with a 140 basis point, or 2.6 percent, increase, which was the first uptick in that sector since April. Sales, new credit applications and dollar collections drove the results, and the study suggested that “the month-to-month proportion of firms denying credit is abating.” In a reversal of trends, the manufacturing index increase offset a 90 basis point decline in the service reading.

Another bit of encouraging information is that fashion and newness may be coming back, as evidenced by Hilldun Corp., which often courts start-ups for its portfolio.

“We’ve been having a very nice year,” said secretary, treasurer and principal Jeffrey Kapelman. “Our volume is up in the range of 10 to 15 percent. That’s a function of new clients, as well as existing business, but some of our existing clients have probably been a little bit spotty, with some having a difficult time finding new opportunities. But the overall trend compared to last year is definitely better.”

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