November 1, 1998, Sunday
Money and Business/Financial Desk
Factoring Factor: An Option for the Cash-Hungry
By SHARON R. KING
tight and the market for initial public
offerings bone-dry for all but the biggest
deals, cash-starved small and midsize companies
are hunting for alternative sources of money.
Galloping into the breach are firms called
factors, which buy companies' accounts
receivable or lend against them.
an opportunity to break out of the niche markets
they have traditionally served, mainly garment
and textile makers, and venture into industries
like health care, construction and technology.
In a growing
number of instances, factors are gaining
customers and working in business partnerships
with an unlikely ally: banks, their main
to see that more and more,'' said Leonard
Machlis, executive director of the Commercial
Finance Association, a trade group for factors
and other asset-backed lenders. ''When things
start to tighten up, as banks lose money in
emerging markets and hedge funds, some
businessmen will not be able to get refinanced''
by banks and will turn to factors, he said. Some
association members, he added, have already seen
an increase in such business.
Concepts, a commercial flooring company
in Saddle Brook, N.J., offers a case in point.
When Len Gleeson and Fred Renshaw, partners in
the company, needed money to keep their
business running, they knew
better than to turn to a bank.
A year ago, a
local branch of First Union Bank turned them
down for a loan, Mr. Gleeson said, because the
company did not have the collateral the bank
required, such as ownership of its headquarters
building. With the climate change in the
financial markets since then, the odds of
getting a loan this time were probably even
more money, Floor Concepts could not afford to
increase staff and buy supplies for jobs already
under way or about to start.
company sold the right to collect $220,000 it
was owed by customers to Quantum
Corporate Funding, a factor in
New York. Quantum advanced Floor Concepts about
60 cents on the dollar up front, and took over
responsibility for collecting from the
customers. Quantum gets its
money back as the customers pay what they owe,
and keeps a further 3 percent, called a
discount, for its profit; after that, Floor
Concepts gets the balance.
plenty of business, but what we really lacked
was cash to fund our business,'' Mr. Gleeson
cost Floor Concepts considerably more to get
cash from Quantum than the company might have
paid in interest on a short-term bank loan,
Quantum was prepared to advance money
without insisting on collateral that banks
usually demand. With its
coffers refilled, Floor Concepts was able to bid
on and win more new contracts, and the profits
from the new work should more than offset the
cost of factor financing, Mr. Gleeson
lending decisions on the borrower's
creditworthiness. But to a factor, the
creditworthiness of the borrower's customers is
what counts. In Floor Concepts' case, Quantum
sized up the likelihood that clients like Barnes
& Noble or Hackensack University Hospital would
pay their bills.
The cost of
money for the client -- akin to the interest
rate charged on a bank loan -- is the discount,
which can vary from 2 to 4 percent on current
invoices due within 30 days, to 15 percent or
more if payments are overdue or are not payable
for several months, or there is much doubt about
the customers' ability to pay. Discounts are
also affected by whether a client promises the
factor a minimum amount of future business or
just wants one deal, and by how much effort the
factor expects to expend to collect what is
is such financing? A 3 percent discount on
30-day receivables is equivalent to an annual
interest rate of about 42.5 percent, assuming
invoices are paid on time.
current form, factoring has been around since
the 1960's, but it has been growing rapidly
lately. According to a survey of its members by
the Commercial Finance Association, factors had
$205 billion in outstanding advances at the end
of 1997, a 21 percent increase from 1996.
garment industry-related business still accounts
for 80 percent of all factoring in the country,
factoring is spreading to new industries, Mr.
Machlis said, partly because of new cooperation
between banks and factors. Instead of just
saying no to applicants who cannot meet their
lending requirements, some banks now steer
customers toward factors.
Sheinker, Quantum's president, says
that every week he receives marketing calls and
visits from bank officials who are looking to
line up factors for client referrals.
Quantum's bank, Sterling National, a unit of
Sterling Bancorp, also sends clients Quantum's
way, said Michael N. Gallina, a senior
vice president for corporate lending at
Sterling. ''If a company doesn't have the
ability to generate a profit, we probably
wouldn't do business with them'' right now, Mr.
Gallina said, but the company may grow into a
profitable future customer. ''If I'm not able to
help them directly, I can refer them to somebody
who can help them. And who knows the benefits of
that down the road?''
also be useful to banks by monitoring the
creditworthiness of receivables for bank
clients, or by helping the bank keep track of
collateral. ''It gives banks some comfort in
lending to companies that are having some
difficulty in troubled times,'' said Richard V.
Romer, executive vice president of CIT Group
Commercial Services, a factor in Livingston,
Four of the
country's largest factors are owned at least in
part by banks. Dai-Ichi Kangyo Bank has a stake
in CIT; Fuji Bank is an owner of Heller
Financial of Chicago, and Nationsbanc and the
Bank of New York each have big in-house
factoring operations. Banks have gotten into
factoring because they like its high profit
margins compared with traditional lending, said
Stewart M. Long, president of Nationsbanc
Commercial, the bank's factoring arm. Bank
factors tend to offer easier terms than
independents but stick to the least risky