Many companies still don’t know that they can sell their accounts receivable, giving them an advance on the funds so they can use it for current working capital needs.
That’s factoring in a nutshell.
Factors today, such as the family-owned firm Rosenthal & Rosenthal, buy the accounts receivable at a discount. The company typically receives 80 percent and the 20 percent is the fee the finance firm earns for the advance, as well as providing some back-office support.
While not necessarily as well-known as other forms of commercial options, such as a loan or even asset-based lending, factoring could very well be one of the oldest forms of financing.
According to the 2016 edition of “American Factoring Law,” many factors credit Mesopotamians for creating the laws and business structure and practices that serve as the base for modern-day factoring. One of the book’s co-authors was David Flaxman, who is general counsel at Rosenthal & Rosenthal. In a blog post from Factor Funding Co., Hammurabi, a Babylonian king in the 18th–century B.C., is cited as the first one to issue a code of laws that included rules governing factoring as a form of funding for merchants. Ancient Rome saw the use of agents — factors — to guarantee trade credits.
Fast-forward to the period from 1550 to the 1800s known as Elizabethan England, a time when the British Empire “sought to colonize the New World.” That period saw the rise of invoice factoring by The East India Co. and The Hudson Bay Trading Co. as they established their commercial empires, the blog said. It further noted that the Pilgrims paid for the Mayflower and their voyage to America through factoring. The same factoring blog noted that a group of Puritans who settled in the Massachusetts Bay Colony introduced the idea of factoring to other colonial trading firms. And in Flaxman’s book, it is noted that these Pilgrims, who had arrangements with three London-based factors, had roots in what was then known as the “cloth trade.”
What likely put factoring on the map in the U.S. was the rise of the textile industry in the 1800s, as well as the early 1900s. That was due to the need for funds to purchase raw goods at a time when bank loans were nonexistent. Even though much of the textiles industry has since moved overseas, factoring still has a presence in the apparel manufacturing sector as a key financing option.
While there has been consolidation in the factoring world, the presence of an independent firm such as Rosenthal & Rosenthal can be a boon for the small- and midsize firms that are still building up their businesses and don’t necessarily have good credit. Free from regulatory constraints, Rosenthal has the freedom to approve financing based on their knowledge of the client, the executive team, and past financing history.
According to Peter Rosenthal, president of Rosenthal & Rosenthal, “My grandfather [Imre] started the company in 1938, with the help of my great-grandfather, who was in the children’s apparel business. He wanted my grandfather, an accountant by trade, to go off on his own.”
Rosenthal said his grandfather started as a lender, thinking it was a good business to go into after seeing that many in the apparel sector needed money. Imre received an initial loan from his dad to start the business, and eventually focused on factoring during the Fifties.
“My grandfather focused on companies in the Garment Center, and to this day it is still the lion’s share of the business,” Rosenthal said.
J. Michael Stanley, managing director at the family-run company and head of factoring, said of Rosenthal’s history, “We had a very important role in financing the garment industry back when the company was founded in 1938. We serviced the industry, financing garment and fabric manufacturers and converters. We also were instrumental in guaranteeing their customers, whether retailers or raw material manufacturers.”
Stanley said the “whole supply chain” was financed by factors because of the “massive need for credit” in the garment industry. Factoring firms in turn “all flourished, until they didn’t.”
Rosenthal noted that there were “probably close to 100 factoring firms before World War II,” but that changed in the Eighties when the factoring sector saw “rapid consolidation.” The president said banks began acquiring many of the privately held factoring firms so they could expand their financial services platforms. That trend shifted again during the recent economic downturn when banks began to exit the factoring business.
“What that has meant is not that the factoring industry has shrunk, just that the number of players has shrunk,” Rosenthal emphasized.
For one of the few survivors in the world of factoring, that consolidation has helped the company grow its volume to a robust $9 billion. Through its acquisition of BB&T’s factoring arm last month, it has added another $2 billion in volume through 90 new factored clients.
Rosenthal counts as clients some well-known names on the designer front, such as Diane von Furstenberg, Rebecca Minkoff, Alexander Wang, Proenza Schouler and Carmen Marc Valvo. Another long-term client is Beverly Hills Polo Club.
But despite having some heavy-hitters among its client roster, Rosenthal said there were some opportunities that were missed. “Kate Spade and Ralph Lauren were potential clients that didn’t come to pass,” he disclosed.
Through the consolidation at retail and the rise in technology, there’s been a need for factoring firms to both modernize how they operate and check out how well their clients are controlling their digital footprint. Rosenthal is no exception.
Today, electronic platforms enable factors such as Rosenthal to handle billions of trade dollars efficiently, as well as quickly check how well a retailer is doing — and in turn how likely are they to pay their vendors — so they can give advice to clients on whether or not to ship goods.
For smaller businesses, the management of receivables and collection services remain the two essential and valuable services that factors are known to provide.
According to Stanley, “We also need to adapt to the changes in consumerism. How is the customer making purchases? What channel? We need to modify our financing platforms to accommodate those changing consumer habits.
“If it’s a retailer, we’re [analyzing] their credit based on sustainability and liquidity. We look at the whole picture to see financial stability and ability to pay. For the wholesaler, we’re looking to see if it’s using the most efficient way to maintain sales. Are they selling to retail and their own stores? Do they own direct-to-consumer platforms? We help finance all three verticals, and when they need money, we need to find ways to come up with a financing solution for them,” Stanley said.