Byline: Thomas J. Ryan

NEW YORK — Tommy does it outside. Liz does it inside. Others change location depending on the function.
It’s factoring — still maligned by many as a costly way to conduct business, yet used by many others for protection against bad debts and often for funding growth. Even at a time when key stores, from Wal-Mart to Federated to J.C. Penney Co., pose a nearly nonexistent near-term bankruptcy threat, factors are in demand.
“If you don’t stay on top of your receivables, you’re dead,” said Adam Winters, vice president of business development at Merchant Factors. “In the past, you’d sell goods and get paid; now you sell goods and you have to fight to get paid.”
Still, many major players have internalized credit checking and receivables collections, largely to save bucks. “If you do it yourself, you can usually get by cheaper than using a factor, but you have to be a certain size to do that,” said Eugene Wielepski, chief financial officer and treasurer at I.C. Isaacs.
Also, some believe bringing credit in-house gives the vendor complete control over its receivables and its entire dealings with the retailer.
But size matters, and many small- to mid-sized vendors rely on factors for credit needs, while concentrating on marketing and production. And many large ones outsource credit to factors, with many believing they save money, since factoring rates have dropped sharply over the past decade.
One is Tommy Hilfiger Corp., which continues to use Century Business Credit to check credit and collect receivables. Under its arrangement, Century establishes maximum credit limits for each customer account and pays Hilfiger as receivables arrive. If a receivable becomes 120 days past due, the full amount of the receivable is reimbursable by Century.
“We view it as an outsourcing of our credit and collection services,” said Amanda Bokman, vice president, cfo and treasurer at McNaughton Apparel Group, which uses Banc of America Commercial. “It saves me the cost of staffing a credit department and the cost of having to buy credit insurance.”
John Daly, president of CIT Commercial Services, the largest factor, said he’s “amazed” all vendors don’t factor, noting that creating internal credit staffs involves heavy investments in systems and dealing with employee hiring and turnover. Outsourcing makes the credit function a variable cost, and factors have clout.
“We have tremendous scale so we have influence with the retailer. We have an indepependent perspective so if you want to press your collections a little bit harder, you can,” said Daly. “It’s a great product for growth companies and it’s also a great product for companies that are transitioning. We’ve had no major terminations of clients because of any kind of cost or service issues.”
But many vendors believe keeping credit in-house is the way to go.
“For a company our size, it’s certainly more economical to do the credit function in-house and we can afford to bury the credit risk,” said Roger Josephs, Kellwood’s treasurer. “If it’s a smaller company, with a narrow customer base and the owner’s personal wealth tied into the business, they might not be able to take the risks we can.”
Josephs also believes Kellwood can go further out on a credit limb than a factor can, noting that a factor often makes arrangements with vendors to share the downside if a troubled chain turns insolvent.
“We’re willing to take more risks than a factor,” Josephs said.
VF Corp. credit checks and collects in-house as part of its overall marketing strategy.
“Our collection people work very closely with our sales people in building relationships with our customers just like our customer service area does,” said Robert Shearer, VF’s vice president of finance and cfo. Obviously, we have all the appropriate controls and checks and balances in place. Our intent is not to find ways to say no; it’s to work effectively and keep the risks low.”
This strengthens VF’s retail partnerships. “When you get an outside company collecting your receivables, you lose some of that relationship,” Shearer said.

The beginning of the 21st century finds vendors financing receivables in various ways. Many hold receivables as collateral on bank lines while getting credit insurance on select marginal stores. Some use factors only for credit guarantees and collections, while others just for funding or for letters of credit. Many use factors for both reasons.
By most estimates, between 35 and 40 percent of the U.S. apparel volume is factored.
Stanley Officina, president at Sterling Factors, said firms such as Jones Apparel and Liz Claiborne have massive infrastructures to support a credit staff, while tiny ones try to save money by going without a factor. “But the vast majority of companies seem to use factoring and find factoring to be an essential tool in running their business,” said Officina.
For many vendors, factoring makes sense because it allows a supplier to concentrate on marketing and design and leave the credit side to financial experts.
“They want to talk to the retailer about reorders, sell-throughs and design trends,” said Miles Stuchin, president at Access Capital. “That’s just a better use of one’s time than to call about bills being 30 days late. It leaves the entrepreneur with a lot of dry powder.”
One advantage in factoring is that the stores often pay a factor first, not only because factors have strong relationships with the retailer’s credit department, but because they support several clients.
“If they run slow or stop paying ABC vendor, the retailer loses one supplier,” said Officina. “If they run slow with a Sterling or CIT, they may lose 10 to 100 suppliers. So, it becomes very crucial for a retailer to pay the factor.”
But many large suppliers, owning several brands, claim they carry clout in getting paid.
“Many of our businesses are of the size that while the retail customer is very important to us, we’d like to think that we’re very important to them,” said VF’s Shearer. VF’s emphasis on building strong partnerships often helps resolve credit issues quickly. “For us, it’s relationship-driven and that’s what it comes down to,” he added.
Many vendors believe factors give preferential treatment to bigger accounts, and factors freely admit that the higher volume clients get better rates because they pay better.
“We’re large so we have a fairly attractive rate structure because, obviously, when you’re that large you can negotiate,” said McNaughton’s Bokman, who noted that its factoring arrangement is part of its bank line. “I find them to be very supportive, but maybe that’s because I’m one of the larger customers and have established one of the better relationships.”
Leslie Fay began using CIT as part of its exit from bankruptcy proceedings and CIT’s credit protection was critical when it emerged, said Warren Wishart, Leslie Fay’s senior vice president of administration and finance and cfo. The firm’s finances have improved to the point where it could absorb a major debt loss on its own, but CIT has been a good partner and helped arrange the purchase of Warren Group and Cynthia Steffe and a merger with Three Cities Research.
“We can do it ourselves, but we’ve found that it is more cost effective with CIT,” said Wishart. “CIT has improved our terms and lowered our fees as we’ve become more profitable. And they’ve been very good in checking accounts we go to.”
Matt Mark, controller at Active Apparel Group, said Century helped initially fund the firm in 1992 and the firm continues to use Century for both credit and collections, and for seasonal working capital.
“Our requirements right now aren’t too big for a major bank facility,” said Mark. “Factors are also more tuned into the retail market. They very seldom get caught.”
Vendors not using factors use credit checking services such as Dun & Bradstreet, Bernard Sands and Global Credit to assist internal credit teams.
On some doubtful credits, Columbia Sportswear, which has about 18 people on its credit staff, offers discounts for early payments of receivables, and Columbia uses straight credit insurance “very, very sparingly” in dicey situations, said Pat Anderson, Columbia’s cfo. For a premium, a credit insurer will guarantee payment of a shipment in a bankruptcy or insolvency.
Besides believing it’s saving money, Columbia said factors would have difficulties dealing with payment terms for outerwear, which often run 120 days or more.

Donna Karan International uses credit insurance for its European accounts, and demands cash or LC’s, or letters of credit, on “rare occasions if the account is somewhat of a risk,” said Joseph Parsons, Karan’s cfo and operations officer.
“We have an established treasury department that does all our credit and collections and we believe it’s more efficient to do it all in-house,” Parsons said.
G-III Apparel Group sometimes uses CIT for credit insurance on iffy accounts. “We have a very strong credit department with a guy who’s been there for 20 years,” said Wayne Miller, G-III’s cfo. “I never felt we needed a factor. What we need is select credit insurance and CIT provides that. It’s kind of our policy to take on as little risk as possible.”
Jerry Sandak, executive vice president at Rosenthal & Rosenthal, said he’s seen some pickup in clients that want partial factoring rather than full factoring, but he said factors have to charge higher rates in these cases. “If you go from full factoring to partial factoring and we used to get $50 million in volume and now it’s $15 million, that obviously is going to affect the rate we charge,” said Sandak. Sandak said Rosenthal would be much less likely to change rates if volume declines because business sours.
I.C. Isaacs looked into spot-factoring, but found “the accounts we want to insure are the ones they don’t. They want to insure the Microsofts and GMs and tend to shy away from the small retail outlets,” Wielepski said. Isaacs puts faith in its relationships with stores. “Our sales force is our first line of defense,” he said.
St. John Knits hasn’t used a factor in large part because the bulk of its volume is at three accounts — Saks Fifth Avenue, Nordstrom and Neiman Marcus — but it believes owning a desired brand avoids most credit problems.
“We’ve always been very fortunate where there’s generally more demand for product than there is product,” said Roger Ruppert, St. John’s cfo. “As a result, especially with smaller accounts, if they don’t pay us on a due date, we don’t ship them anymore. It’s a little bit different than selling a commodity.”
Saul Berkowitz, managing director and accountant at American Express Tax and Business Services, said credit and collection is becoming a frequently outsourced function, and factors are skilled in preventing bad debt hits.
“A vendor will not have as complete a credit file on its customers or as complete a pulse on the business climate as a factor,” said Berkowitz.
Although many believe it’s costly, others believe competition and technological advances have reduced factoring rates to bargain levels.
“The factoring rates for most companies are so low today that even the largest companies consider using a factor because they like the idea of a credit guarantee,” said Nate Lubow, consultant at Mahoney Cohen & Co. “They also like the idea of outsourcing the accounts receivable management department. If a manufacturer is sound and doing it for those reasons, it becomes cost effective.”
He said it’s costly for struggling vendors needing over-advances on credit lines. “The factor will pound the client for all it can get,” said Lubow.
The biggest threat for factors, they noted, has been losing clients acquired by factored firms, including Claiborne, Jones, Warnaco Group, Kellwood Corp. and VF.
The true test will be the next spate of retail collapses and subsequent revelations of whether internal credit staffs or factors dodge bad debts best. Recent bankruptcies such as Loehmann’s, Filene’s Basement and Stage Stores caused miniscule bad debts, but factors said Ward’s and many regional chains are tough credit calls. Also, several big chains, including Penney’s, Kmart and Dillard’s, are good credits today, but eventually need to catch up to competitors or turn into serious risks.
Thomas Pizzo, president at Century Business Credit, noted that vendors traditionally rush to factors when the retail climate turns tough, and suspects factors may be busy if an economic downturn arrives in 2001.
“What with retail having very poor results so far this year and an anticipated tough holiday, it makes no sense to hold your own paper,” said Mark Bienstock, executive vice president at DCD Capital. “It’s going to be a very tough environment, with the stock market coming down and interest rates coming up. And the mediocre middle-level guy is already being squeezed, so it’s pretty scary.”

Public apparel companies that use factors:

For credit checks and collections: Tommy Hilfiger Corp. (Century Business Credit); McNaughton Apparel Group (Banc of America); Steve Madden (Capital Factors); Kenneth Cole Productions and Kasper A.S.L. (CIT Commercial Services)

For funding: Bernard Chaus (GMAC Commercial Credit); Movie Star (Rosenthal & Rosenthal); Ashworth (Bank of America); Danskin (Century)

For primary funding, credit checks and collections: Leslie Fay, Aris Industries, Nitches, Donnkenny and Salant (CIT Commercial Services); Active Apparel (Century); Candies (Rosenthal)

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