Conditions ripe for borrowing - Corporate Finance

All things considered, this is a good time to be factoring, borrowing, or looking for asset-based loans. Cash flow is high, fueling rate competition. And the lenders, whether they are factors, banks or finance companies, are all in hot pursuit of clients.

Apparel manufacturers thinking about factoring should get in the game now. With the strength of the capital market, there is a lot of liquidity, and rate competition is intense. Under these conditions, factors' traditional target clientele - manufacturers that might fall a notch below bank-lending standards - are getting almost bankable rates from many in the factoring industry. And other financial institutions have joined the fray. But the rules still apply, and despite the rising competition and their increasing appetite for risk, factors are not throwing all caution to the wind. What's happening is that service and product differentiation are becoming vitally important to factoring, as the fraternal, yet fiercely competitive niche continues to look for ways to increase its profitability in the face of the pressure to cut percentage points.

To that end, the financiers are emphasizing the unbundling of the traditional factoring package and more than ever are tailoring their offerings to customers' needs, be they credit protection, bookkeeping or collection services. Asset-based lending has become an increasingly popular trend, with most factors adding that option to their portfolio of offerings.

Factors See Potential Profits Among Small- to Mid-Sized Manufacturers

The talk has been rosy about the overall apparel picture in 1997 and prospects for this year. But even in view of such optimism, Lawrence A. Marsiello, president and CEO of She CIT Group's factoring operations - arguably the largest factor - emphasizes that a lot more effort is required these days on the manufacturer's part to obtain volume and profit growth. Marsiello notes that many still have to make the supply chain technology transition to maintain their importance with stores.

Still, the CIT factoring chief points out that small- and medium-sized manufacturers can be in a strong position if they can deliver the right goods. "The whole world cannot be in the hands of three or four brands. Retailers, in order to be successful, need creative, fresh merchandise," notes Marsiello, who adds that the most creative products consistently come from medium-sized firms, and that retailers "are scouring for differentiation.

"On top of that," he continues, "the retailers are competing with the stores that are owned by manufacturers. So the landscape has become much cloudier. You have had textile mills that have forward integration into apparel manufacturing: and retailers are developing their own store brands, all in the name of distinction and product assortment."

Marsiello believes that this is a transition situation which will continue for several years. "Look-alike stores aren't a sustainable strategy. And that bodes well for the industry, whether it's factoring or asset-based lending services, in that many of the medium- and smaller-sized companies want to have strong relationships with organizations that are geared to service their needs."

At CIT, the difference between asset-based lending and factoring has become a blur, says Marsiello, who emphasizes, however, that the organization is looking much more closely at the management team of a potential client as a result of the continuing consolidation among stores and vendors. As he puts it: "With the transition to Quick Response methodologies and the sourcing from multiple countries these days, the ability to adopt new ways and abandon old ones sets one management team apart from another."

Additionally, Marsiello believes that factors and finance companies can offer cost-effective packages to those they do represent. Even though these options are not always the least expensive, they may be the most flexible, allowing the borrower to grow his business. For CIT, volume is trending higher than the more than $13 billion it did in '96, and the company remains focused on its core businesses, with apparel and textiles at the top of the list.

Flexibility the Key to Business

There's no doubt that in this super-heated, competitive environment, the factoring community has become creatively flexible. Capital Factors, for example, which has had strong growth, and expects to beat its 1996 number of $2.6 billion by 20 percent to 25 percent, has established an asset-based division. As Michael Sullivan, senior vice president, explains, while most factors are interested in clients in the $10 million and up sales range, Capital has its eye on the lower level, in the neighborhood of a half million up to $10 million.

Sullivan also notes that a client can be both an asset-based borrower and a factoring customer. "If you have an inventory facility, you're really doing that on an asset base, and we might be doing full receivable factoring as well," he notes, commenting that the company has done deals in which it has a factoring arrangement, a term loan and an inventory facility all rolled into one.

Like Marsiello, Sullivan observes that factors are being more aggressive in trying to leverage their client base, and says, "If we are doing the accounts receivable in the factoring part, and there are other loans the customer has with his local bank or finance company, and he's borrowing on his inventory, we say, 'Why don't you let us do that?' We're looking in the industry as a whole to broaden our funding base."

The publicly-owned Capital was acquired by Union Planters Corp., a Memphis, TN-based bank holding company with $15 billion in assets. Sullivan thinks the only changes will be positive ones: "It is a much stronger parent company that is able to fund us better. And it brings many branch offices in the Southeast and Southwest that we didn't have access to before."

Adequate funding, as Sullivan notes, is the name of the game that allows the factors some leeway in the market. As for Michael J. Roche, president of Heller Financial's Current Asset Management Group, he believes that "funds employed" can be a better indicator of a factoring organization's strength and direction than volume numbers, even though his company's volume performance is certainly nothing of which to be ashamed. Roche expects Heller's volume for '97 to increase by about 7 percent, to $7.8 billion.

Looking at his group's funds employed status for 1997, Roche reports that it is comparable to '96, at about 14 percent. And it is his goal to make that grow more toward inventory, even though most is still on receivables. He amplifies: "The factors have the expertise, knowledge and technology to do that kind of lending and support it. And manufacturers need more funding because they're being asked to hold goods longer as a consequence of just-in-time."

To illustrate his company's flexibility in its quest for growth, Roche advises that asset-based lending with a credit guarantee represents about 1 percent to 2 percent of Heller's portfolio. As he puts it: "The clients are doing their own receivables, but we're also giving a guarantee on the credit. It's still somewhat unusual for the factoring industry, but I'm sure that others are also doing it."

Although Republic Business Credit Corp. didn't officially have an asset-based lending strategy last year, John Heffer, president, says, "It will be on the company's menu of financial services as an adjunct, but we will not decrease our efforts in the traditional factoring market."

Heffer expects Republic's volume to rise about 4 percent for 1997, against a record '96 number of about $5.5 billion.

Also with an eye for a larger slice of the pie, Austin Broadwell, Sun Trust Bank's factoring head, notes that people are increasingly willing to pay for high quality services and a sophisticated product. However, he says, "I don't think our industry is immune to the same issues that face every industry globally, and that is that they are all extraordinarily competitive."

Sun's volume probably will be down to about $3.2 billion for '97, as a result of the loss of two major mill clients toward the end of 1996. However, Broadwell reports that the company has rebounded from the setback and that business is good.

As a result of the competitive rate situation, Stuart Brister, senior vice president of NationsBanc Commercial Corp., says the company is positioning itself for the future by investing in technology, including the Internet.

"We're going to be a player and we're committed to the long term of this business," declares Brister. "Some others aren't choosing to do that. ... We have 13 factors today; five years ago we had 30. I would bet my mortgage that in five years you'll have half of the remaining players. They'll either merge or go out of business."

NationsBanc, which did $7.7 billion in '96, expects the final '97 result to be on the plus side. (CIT and NationsBanc are the two factors that are declining to report their annual volume on the basis that the "numbers derby" is misleading because the figures presented include other than factoring business.)

Naysayers don't much concern Jerry Sandak, who expects Rosenthal & Rosenthal to be around in five years. Sandak, executive vice president, believes that no matter how much consolidation takes place, the smaller, entrepreneurial, family-owned factors, such as his company, will continue to have a place in the business. In fact, Sandak says, "[1997] was the best year we ever had. We're going to be close to $2 billion and we're making a big push; we're meeting the competition head-on."

Looking ahead, Sandak believes factoring is going to move in the direction of collateral management, "because we can do it more efficiently, probably, than a company can." The difference, as he explains it, is that "the factor doesn't guarantee the credit, but, because he's highly sophisticated and highly automated, he can handle the booking and collection of the receivable."

As for Congress Talcott, recent focus has been on international business, says Kevin McGarry, recently named president. McGarry says that his firm is doing about a half billion dollars in Hong Kong now, and advises, "That's pure factoring and also the unbundled factoring product. We've also done some lending to the region in participation with banks overseas. That's asset-based lending and it runs the gamut of receivable inventory."

In his view, today's successful factoring company is one that empowers people to make decisions. "And," he emphasizes, "we are taking steps toward shortening the approval process to provide for quicker turnaround time." Congress Talcott has seen some rebound from a couple of years of shrinking sales, and is looking for growth in 1997. In '96, its volume was $3.9 billion, down from $4.1 billion in '95.

The dean of re-factors, Walter Kaye, president of Merchant Factors Corp., advises that he entered the asset-based lending field last year, and is heavily involved in the business through a newly created entity, Merchant Financial Corp. Like Capital, Merchant Financial is aiming its asset-based business at clients with modest needs, or those with sales of between $200,000 and $1 million.

Kaye says, "That's a neglected market. As we found when we began the re-factoring concept 12 years ago, nobody was paying attention to the smaller factoring prospect then."

Kaye - who offers that '97 was a banner year for his company, with expectations for a 25 percent increase from its 1996 volume, to more than $225 million - sees asset-based lending as a fast-growing component of finance, as a result of corporate outsourcing and the emergence of a service economy.

The only hesitation about factoring/financial growth, if not this year, then sometime down the road, comes from Sun's Broadwell, who says: "You read about the stock market and the Asian situation - the thing that concerns me more than any other is the ultimate consumers' debt position. Because, in the final analysis, that drives the retail trade and that backs up and impacts on us. That would be my No. 1 concern."

RELATED ARTICLE: FACTORING TAKES A BUM RAP

During his company's annual stockholders' meeting last June, Robed N. Wildrick, chairman and CEO of the troubled 93-unit, St. Louis, MO-based Venture Stores, blamed factors for shortages of apparel inventories that impacted the chain's total volume picture.

Factoring industry executives say he was lashing out at a perennial whipping boy.

At the meeting, Wildrick called factoring an uncontrolled industry with too much power, and said that it should come under government regulations similar to those imposed on banks.

Despite efforts to turn them around, Venture's sales continued to decline from the time of the meeting. For the 35 weeks ended Sept. 27, 1997, sales were $844.3 million, compared with $912.8 million for the same period in 1996, a decrease of 7.5 percent. The chain will not report year-to-date same store sales for the remainder of 1997, saying that comparisons for July and August were not meaningful due to the effect of liquidation sales activity at 20 stores that were sold. Apparel accounts for about 30 percent of its volume.

Typical factoring industry response to Wildrick's charge comes from Michael J. Roche, president of Heller Financial's Current Asset Management Group, who says such comments are "out of left field."

Roche stresses: "We never make a penny of revenue by refusing to check a retailer. So, when and if we do that, it means we have some serious doubts. That's why our company's tag line is: 'Finding a way to say yes.' We're looking for ways to help our clients service the retail community."

Jules Abend is a Bobbin contributing editor and editor of Clarion Inc., a Howell, NJ-based international news gathering organization.

COPYRIGHT 1998 Miller Freeman, Inc.
COPYRIGHT 2000 Gale Group