FACTORS ASSUME NEW ONUS
Byline: David Lipke
NEW YORK — The aggravation of difficult retail conditions brought on by the Sept. 11 terrorist attacks has significantly elevated the importance of the factoring community, which is finding itself helping manufacturers bridge the gap between their original expectations and the current challenging realities.
Bruce Cohen, president of Westgate Financial Corp. pointed out: “Now is the time we earn our living; clients have had orders canceled, are short on cash and in our good relationships, we are supporting them.”
Factors report widespread cancellations and postponements of orders from retailers, which reduced factoring volumes and necessitated overadvances to clients. “The financial status of many of our clients has tightened up from slower sales and canceled and pushed-back orders,” said Steven Stone, executive vice-president at Century Business Credit, a division of Wells Fargo Bank. “They have less receivables to pledge but have the same cost structures and need more money from me. That’s the crux of the problem.”
Century is giving overadvances, or loans in excess of previously agreed upon receivables-to-credit ratios, to clients “in a judicious manner,” said Stone. “Hopefully, this is a timing difference and the sales will come in later in the calendar. But we are absolutely taking on a bit of risk.”
According to Walter Kaye, president of Merchant Factors, most canceled orders are from department stores, as are increased allowances and chargebacks. “Anybody who is selling to department stores has had problems,” he asserts. “We’ve been lucky because our thrust in factoring is those clients who service the mass merchandisers and discounters. In this environment, consumers want more bang for their buck and are patronizing those types of outlets.”
An early October research report from Ferris, Baker Watts analyst David Lamer supports Kaye’s assertion. “May Co. has pulled the trigger on order cancellations,” wrote Lamer. “According to industry sources, the company’s chief executive officer, Gene Kahn, has given his merchants the directive to cancel roughly $300 million from holiday on order.” Additionally, Lamer wrote he believes it’s likely that Federated quickly followed suit.
Responding to the Lamer report, a May Co. spokeswoman commented: “May has said that prior to the Sept. 11 events, we recognized the continuing economic slowdown and had begun to adjust our orders based on that view. We continue to plan appropriately and react to the situation.”
Kaye said he knows of vendors who are negotiating 40 percent discounts to department-store buyers, to accept previously placed orders. “There is no question this would affect the factor — they are getting dilution off their billing,” noted Kaye. Moreover, Kaye anticipates “a very lackluster” holiday season, which may occasion more bankruptcies. “When clients go bankrupt, there is a loss of volume for the factor, receivables cannot be collected sometimes, and there are client write-offs, which hurt profitability,” observed Kaye.
Kaye’s fears are echoed by retail watchers, who are forecasting the gloomiest holiday season in a decade. “U.S. retailers are expected to experience the weakest holiday season since the recession of 1991,” wrote senior economists in a Sept. 26 report from Retail Forward, a consulting firm formerly known as the Retail Intelligence System of PricewaterhouseCoopers. Core retail sales, which exclude automobile and gasoline sales, are expected to grow 1.5 percent in the fourth quarter, according to Retail Forward, down from 4.5 percent in the final quarter of 2000.
Some factors said that getting imported merchandise into the U.S. was not currently a problem, while others reported clients who are facing increased delays, due to stricter security measures. “Ships are being kept offshore longer, containers are held in customs, boxes are being x-rayed, paperwork is being triple-checked,” said Century Business Credit’s Stone.
Yet, John Daly, president of Tyco Capital Commercial Services (formerly CIT Commercial Services), characterized the current standards and practices in the factoring industry as “business as usual.” He said his firm has been “a consistent lender, through blue skies and gray. I can’t speak for the whole world, [but] there has been no credit tightening on our part. Especially on customer credit checking, we have been remarkably consistent with our policies.”
Steven Sall, president of Republic Clothing, and a Tyco client, concurred with this assessment, noting “nothing has changed” since September in his relationship with the factor. “We have an automatic approval system for orders,” and that continued throughout the month, he noted. What’s more, Sall was one vendor fortunate enough to not have “one stitch of merchandise canceled,” following September’s slowdown.
One company that’s been at least somewhat affected by the credit environment is Nicole Miller, a Tyco client. “There is a tighter rein now,” asserted Bud Konheim, ceo of the design house. “Factors are looking at all the receivables, scrutinizing everything, and reducing their load. There is less leeway. We have to perform better than ever for the same results,” he said.
While Konheim describes his relationship with Tyco as “great” — Nicole Miller is a featured client in advertisements for the factor — he points out, “as good as they are, a factor’s main concern is protecting themselves.+And when factors talk about ‘working closely’ with clients, that means they’re worried.”
Most factors agreed that there has been no tightening of standards regarding their credit checking of retailers. “Sure, we are being vigilant for signs of weakness [at retailers], but there has been no change in credit checks,” said Jerry Sandak, senior vice-president at Rosenthal & Rosenthal. “We are absolutely not pulling in our horns.”
David Milberg, president of Milberg Factors, pointed out that the creditworthiness of retailers is always fluid and factors are always attentive to changes. “We continue to look at credit carefully but I don’t know that [Sept. 11] changed things,” he said. “Are we concerned about what could happen? Of course. And without a doubt, we are monitoring our exposures carefully, but I don’t think credit is tightening.”
Retail consultant Emanuel Weintraub, however, takes a somewhat different view. “Factors, like all lenders today, are concerned about credit quality,” he asserted. “With the terrible climate at retail, factors are being very cautious about credit. But they’re in the business of lending money, so they are never going to say they are tightening the purse strings.”
Jeffrey Kapelman, secretary and treasurer of Hilldun Factors, did allow that his firm is “watching any stores that were marginal credit before more closely to see if they were affected by business that slowed down.” However, he went on to claim: “We haven’t seen any further weakness as of yet, and we hope to cut [retailers] as much slack as possible, if necessary.”
Despite discussion of some challenges factors are encountering, the year is, in fact, shaping up to be a positive one for many, in terms of new business. “The economy has people concerned and businesses see factoring as good insurance for collectibility of receivables,” said Stanley Officina, president of Sterling Factors. “In good times, companies turn to factors to expand their business, and in tough times, they turn to us to survive. Our business, in general, is ahead of last year.”
That recent uptick in new business opportunities was repeated by executives at Tyco, Milberg Factors and Spectrum Financial. Several noted that banks are becoming more risk-averse in the current economic climate. “As unsecured lenders begin to look closer at their portfolios, it presents more opportunities for secured lenders like factors,” said Barry Essig, president and ceo of Spectrum Financial Corp.
Additionally, the August bankruptcy of Ames Department Stores reinforced to many manufacturers the importance of managing credit risks, noted Milberg.
In another plus for factors, Westgate Financial’s Cohen added that the current lending environment may help them win more business in industries outside of apparel. “Factoring has always been one of the major methods of financing in soft goods, and I think other industries will be more receptive to us now that banks are tightening,” he observed.