RE-FACTORS FEEL SQUEEZE
Byline: Sidney Rutberg
NEW YORK — Volume in the re-factoring industry, where firms handle small clients generally in the $500,000 to $3 million in sales range, is still going up, but competition is tightening and rates are under pressure.
“Everyone is my competition, even the big guys, so we get pressure on rates,” said Walter Kaye, president of Merchant Factors, the oldest and largest of the re-factors.
Merchant, which is in its 12th year, has been capitalizing on the need for factoring services for companies that are too small for the majors to service profitably.
A re-factor provides the credit guarantees and advances against receivables but lays off the customer credit risk with one of the larger factors. Merchant, for example, re-factors with Republic Factors and by pooling the volume of all Merchant’s clients, ranks among Republic’s largest clients.
Other majors that handle re-factors as clients are Fort Lauderdale-based Capital Factors, based in Fort Lauderdale, Fla., which handles Spectrum Financial Corp., based in Palm Beach, and Westgate Financial of Hoboken, N.J. Atlanta-based NationsBanc Commercial also handles re-factors.
Rates charged by the re-factors vary based on volume, invoice size, risk and other criteria. But typical rates for a company doing around $2 million would be a commission charge for the credit protection feature of about 1 1/4 to 1 1/2 percent of sales.
Interest charges on money advanced run around 2 to 2 1/2 percentage points over the prime rate.
The re-factoring business has been growing nonstop since Merchant set up shop, but last year the industry was hit with a bankruptcy. Initial Funding Corp. was named in an involuntary Chapter 11 bankruptcy petition in December by three clients with credit balances at the re-factor. Credit balances roughly represent the difference between the amount a factor advances against receivables and the amount collected. Clients usually regard these balances as money in the bank to be drawn down when needed.
In the case of Initial Funding, credit balances have been frozen since Dec. 24 and will not be freed until a dispute with Initial Funding’s bank creditors is resolved.
While the solvent re-factors play down the impact of the Initial Funding bankruptcy, clients and prospective clients have shown increasing interest in the financial strength of the re-factors.
Said Merchant’s Kaye, “We’re well financed, and I tell the clients to check us out with our banks and factor.”
Charles Schillaci, a principal in GST, a re-factor that uses Republic Factors, said his firm’s volume was up about 8 percent to $150 million last year and was “very profitable.”
Schillaci noted that there can be no credit balance problem with his firm, because his clients don’t carry credit balances.
“The day we collect money due the client, we send it right out,” he said.
One of the newest re-factors is Spectrum Financial, which finished its first full year of business in 1996 with volume around $55 million, according to Barry J. Essig, president and chief executive officer.
Essig added that with all the new business signed up, Spectrum’s volume is running at an annual rate of $100 million.
“About 50 percent of our volume is in apparel and textiles, principally in South Florida and metropolitan New York. We take clients doing as little as $500,000 a year and even take a shot at some startups if the people are experienced and decently capitalized. The typical client is in the $1 million to $3 million range, but we think we can be competitive with the big guys, even up to $15 million or $20 million.
“Although the apparel industry remains spotty, there seems to be more optimism among our clients than there was last year,” he said.
Another Capital Factors client, Bruce L. Cohen, president of Westgate Financial, said volume doubled last year to $67 million.
“Our business is mostly soft goods, including shoes, handbags, belts and other accessories. We see some good growth in the second half of this year, but competition is getting tougher. Some is coming from the smaller banks, which seem to be loosening credit standards to pick up business.”
Hilldun Corp., long a source of asset-based financing for small designer firms, entered the re-factoring business four years ago and has been steadily building volume.
Working through NationsBanc Commercial, Hilldun’s factoring volume was about $40 million last year, according to Gary Wassner, president.
“We had a record year in 1996 and are projecting another good year for 1997. We’ll probably do about $50 million. But competition has been heating up, with more companies entering the market,” Wassner said.
Hilldun’s clients are principally apparel manufacturers, including high-end designer firms and those that sell to the mass market. “Orders are strong going forward, but retailers are buying closer to their selling season,” Wassner said.
Merchant Factors’ volume was up about 10 percent last year to $220 million, and January started this year out “very strong,” Kaye said.
“But rates are deteriorating,” he added. “There’s no money to be made on a non-borrowing account, but we take them on. And as their businesses grow, and they need extra capital, they borrow, and we can obtain a yield on our funds.”