The Factoring Force BIG Blog

At the recent annual meeting of the International Factors Group (IFG), the Polish company Pekao Faktoring was named as the #1 factoring company in the region. The IFG meeting was held in St. Petersburg (Russia, that is) in October.

Of course, the company was thrilled with their recognition and the president,  Mirosław Jakowiecki, declared, “I am proud of these realizing that such a position covers not only Poland. It means, Pekao Faktoring is the best Factor in Central – East Europe as well.”

Of course, my fascination with the international factoring community led me to explore the Pekao Faktoring company website to see what this firm is about. Fortunately, the website has an English translation version and I was able to review the entire site in my native tongue. The website is attractive though a bit lacking in substantive information about factoring and the services provided by Pekao. Naturally, I’m comparing this to the sometimes terribly wordy and overblown sites that many U.S. factors present online.

There was, however, one very unique statement that appeared right on the About Us page of the Pekao Faktoring website. It reads as follows:

“Pekao Faktoring is a company fending for employees helping to develop professional skills and guarantying workplace for mothers with child. The team grows, within last two years in the families of Pekao Faktoring employees 25 children were born.”

Now I dare you to find me one other major finance company that boasts of the birth-rate of its employees. Apparently, Pekao is looking for a few good women and is willing to create a family friendly workplace to attract them. So Pekao is not only the #1 receivables factoring company in the region, it is a factoring company that factors in the well-being of the families of its employees. And that is a strong factor in their favor.

Na zdrowie, Pekao! Stolat!

We hear a lot these days about companies that are too big to fail. Appears that CIT is not too big to fail but is too big to go into bankruptcy without causing a lot of chaos for its factoring clients. (Image courtesy of European Pressphoto Agency)

According to an article in the Wall Street Journal online edition, the

upcoming restructuring and likely bankruptcy of CIT may have a serious impact on the thousands of small-to-medium size companies that make up the factoring client base of CIT. The reason? Cash flow.

Apparently, the very issue that receivables factoring is designed to address is the problem CIT may have after restructuring. After all, invoice factoring for small businesses provides the cash flow that would not be forthcoming quickly after invoices are issued. If CIT doesn’t have cash after settling with its debtors, then how can it purchase the invoices of its factoring clients and provide the needed cash?

There is something utterly ironic here, don’t you think? So who factors for the factors?

Heavyweight investor Carl Icahn has offered to provide a loan of up to $6 billion to ailing receivables factoring giant CIT. Icahn is a bondholder of CIT and is not in favor of the restructuring plan proposed by CIT and is countering the proposals of the lender with a restructuring plan of his own. Icahn has been highly critical of the CIT management team and believes that new management would have a much better chance of receiving favorable consideration from banks.

CIT provides factoring services for as many as 1 million companies. These include retailers and suppliers who would be challenged to maintain operations if cash flow were suspended. With the holidays fast approaching, these companies can ill afford to see funding suspended from what is essentially the lifeblood of their business.

It is astonishing that one company’s distress can affect so many other businesses. It points out the critical importance of receivables factoring and the vulnerability of those who depend on those services. I’m sure that these companies were receiving favorable terms from CIT due to their size but it makes me wonder whether a few dollars in savings is worth the risk of being a minnow in the ocean of CIT’s client base. Just as community banks are still thriving in a down economy, smaller, more nimble factoring companies continue to support thousands of companies during these troubled times. I’m sure that there are many companies re-thinking their approach to receiving accounts receivables factoring support from mega-lenders in the future.

By the way, doesn’t Mr. Icahn bear a resemblance to Mel Brooks in this photo? I can assure you that there is a lot of “High Anxiety” among those involved in the CIT debacle. Board meetings at CIT probably resemble the campfire scene in “Blazing Straddles.” Lots of gas being passed.

In a press release issued today, Homex, one of Mexico’s leading home builders, announced their satisfaction with FOVISSSTE, a Mexican mortgage company, for implementing a factoring program with Mexico’s National Development Bank.

The CFO of Homex stated that the factoring initiative “will help us realize important efficiencies in our collection process.”

Now I’m not quite sure what the CFO is referring to here or what exactly the structure of the factoring program is. It is not really clear who is receiving financing. It appears that Homex is able to factor receivables through this program but receivables from whom? If consumers are purchasing directly from Homex and they are receiving mortgages from FOVISSSTE, then that is merely a mortgage loan. Somehow, payment is expedited in this process but the details are pretty murky.

So, I would advise the Homex PR team that, if they want to maximize the impact of an announcement such as this, it would help to give more details as to exactly how this benefits them. It appears that the financial and investment community is the target of this release but I’m not quite sure what the analysts are supposed to glean from this type of statement.

If I come across anything else I’ll publish it but if anyone else can shed some light on this let us know with a comment.

It continues to fascinate me that receivables factoring has such a prominent and public profile in Asian and European countries. While it seems to me that most of what you read about receivables factoring in the U.S. is purely self-promotioanl by factoring companies, the financial news from overseas regularly mentions asset-based factoring as a component of a corporate profile or as an integral element of some type of major capital funding initiative.

Case in point… I read a press release today that announced that China Security and Surveillance Technology, Inc. (CSST) was awarded a contract tp provide some type of service in the development of what is called an E-city in Nanjing, China. An E-city, as I understand it, is a type of infrastructure designed to support a variety of digital support services for the growing technological needs of businesses, government and citizens. (Of course, I may be understanding it entirely wrong but this will do since it is only incidental to my primary point of interest.)

What struck me in this release was the quite specific role that receivables factoring would play in the financing of this project for CSST. The release states:

The project’s construction will be subjected to specific installation arrangements separated
into several phases, and corresponding revenues will be recognized upon
completion of each phase. In addition, the Industrial and Commercial Bank of
China (”ICBC”) will provide accounts receivable factoring service and working
capital financing facilities for each phase of the project.

In other words, ICBC will be factoring the invoices that CSST passes on to the Chinese government and making sure that CSST stays solvent while they await payment. That’s pretty blatant stuff.

Later on in the release, the CEO of CSST states:

As we had firmly established cooperation with large
Chinese local banks in the past year, we are confident in our abilities to
undertake big projects and believe that the receivable factoring agreements
will fully satisfy our working capital needs. In addition, as we continue to
push ahead with our bids for larger government contracts, we believe that the
factoring agreements and other financing arrangements will continue to serve
as strategic advantages and key factors in winning our bids.

The CEO is pointedly crediting factoring as an essential “factor” in enabling CSST to be competitive and land large government contracts. Somehow, I wonder if this sort of frank declaration would be viewed bu U.S. financial agents as a positive or negative.

Maybe it’s a cultural thing.

Sounds like growing pains to me.

As I scan the financial news I come across more and more announcements that some major financial institutions are expanding their services to include receivables factoring. This morning I read that Punjab National Bank (PNB) is adding investment services and invoice factoring to its menu of financial product offerings. The general manager of PNB stated that the target for the factoring service would be “small vendors and MSMEs which I now know stands for Micro, Small and Medium Enterprises.

But even as receivables factoring services expand around the globe,  back here in the states, two well established factoring companies were bilked out of $4 million by a U.S. Army officer and two accomplices in a bogus defense contracting scheme. Allegedly, the three set up fake communications contracts supposedly with the U.S. Armyand then convinced Federal National Payables Inc. of Bethesda, MD and Associated Receivables Funding Inc. of Greenville, SC to fork over about $4 million dollars against these contracts.

I’m not sure the author of the story about the asset factoring fraud really understood the role of the two factoring companies or how they really operate. The reporter states that the companies “hand out the dollars for federal contracts.” Just goes to show you how little understood the factoring industry is outside of certain circles. I’m sure that what really happened was that Federal National and Associated Receivables were essentially providing a factoring service to the phony federal contractor based on the assumption that the Army would be reimbursing them.

I find it ironic that on Federal National’s website, the company states the following:

“Federal National’s slogan, “Service, Value, Trust” summarizes its approach to doing business. In an industry not known for these qualities, Federal National is known for it’s professionally delivered, reliable and reasonably priced financing, fairness and strong ethical conduct.”

Whoa! That’s a ringing endorsement for the factoring industry. But in this case, the factoring company wasn’t the screw-er, it was the screw-ee. (See photo with previous post)

As if things weren’t murky enough on Wall Street right now the relationship between Morgan Stanley and CIT has just made things even murkier for factoring clients of CIT. (”Murky” is a great word isn’t it. “Murkier” is even better.)

Apparently, Morgan Stanley is advising CIT in its restructuring and one of the strategies is to use the credit balances provided by the assets purchased from their factoring clients to offset the equity deficiencies at CIT. In order to keep that “balance” and present a more positive balance sheet profile for shareholders, CIT has been slow to release cash to clients for the receivables that they have purchased. Consequently, clients are ending up in a tight cash squeeze.

In an article appearing in the Wall Street Journal online edition, writer Donna Childs points out the conflict that this presents for Morgan Stanley. In an effort to present a healthier financial profile for CIT, Morgan Stanley is holding back on the cash that thousands of factoring clients depend on to stay solvent. Ms. Childs points out that the practice of purchasing receivables whose value exceeds the available cash available is called conversion. The asset side of the balance sheet of the factor appears healthy when, in fact, there is still cash due to factoring clients.

The irony here is that invoice factoring exists to expedite the flow of cash to a company. In this case. it appears that Morgan Stanley and CIT have conspired to keep CIT afloat by using the assets of CIT’s clients as a life raft. It seems to me that this is unethical at the very least.

As has been the case so far in this era of bailouts, the little guy ends up footing the bill. Frankly, I don’t know what incentives CIT and Morgan could be offering factoring clients to continue in this lemming-like march to potential disaster. Factoring is about cash and moving cash faster. Looks like CIT factoring clients may have to factor the receivables from their factor. And a new industry is born!

I try and keep track of what’s going on in the receivables factoring industry by subscribing to things like Google Alerts and by plain old web surfing. Unfortunately, what I run into most frequently are self-promotional articles and blog posts all of which are essentially “An Introduction to Invoice Factoring.” Writing and distributing articles is a good way of gaining visibility online but it would be nice to see some more creative approaches to presenting the concept and the various facets of the practice of asset-based factoring.

But at least these cookie-cutter explanations present an accurate definition of receivables factoring and the basic strategies involved. The same can’t be said for the information that I read about business factoring on the website and in some distributed articles from Innuity Funding. In fact, I don’t believe that I have ever read a more erroneous explanation of factoring.

On their website, Innuity basically defines factoring as:

“…a way for businesses to sell off unpaid receipts to a collection agency so the business is able to retain a portion of the sale. Factoring usually takes place when a small business doesn’t have the time or resources to pursue a customer who does not want to pay for services rendered by your company.”

Huh?! I think when you sell off receivables to a collection agency it’s called “being turned over to collections.” And you don’t sell off your receipts. A collection agency keeps a portion of the collected amount as compensation for their services. I used to work in the grocery industry and when you had damaged product or product that was close to being ou-of-date, you sold it off for whatever you could get and wrote off the difference. We called this “salvage.”

Factoring is not salvaging. Factoring is putting your assets to work proactively and productively. It is not a fire sale on uncollectable bills.

Perhaps it is part of Innuity Funding’s strategy to misrepresent receivables factoring. I actually don’t believe that they offer factoring services. They apparently offer commercial loans and lines of-credit for businesses. If anyone was considering factoring and read the Innuity definition, they would likely run away… to a commercial loan.

A method to the madness?

So, while their are a million elementary explanations of factoring out there, Innuity’s certainly is not one of them.

Whenever I have the urge to plunge into the murky world of finance and reveal to myself how very much I don’t understand, I track down an article or press release from the UK. Oh, those British! They really know how to turn a phrase.

As I was reviewing the intriguingly titled “Epitaph for the Overdraft,”  distributed over PR Newswire, I encountered the term “overdraft facility.” Now I understand “overdraft protection” (a device which I wish that I had in place quite a few times due to my wife’s inability to keep a balanced checkbook) but I was not quite familiar with an overdraft facility. Frankly, it sounds to me like a British restroom available to those who have consumed more beer than their bladders were able to accommodate. “Excuse me gents. I must use the overdraft facilities to make a deposit. Order me another pint while I’m at me business, if you’d be so kind.”

Not quite. Apparently, an overdraft facility is a program that allows individuals or businesses a certain amount of  cash beyond what is actually available in their bank  account.  Typically, an overdraft facility is used to address cash flow issues. Apparently, the advantage over a loan is that the account holder has a specific amount of funding available but does not have to take possession of the amount and be responsible for interest on the entire amount.  These overdraft funds can be utilized in increments over time and interest is charged only on the amount utilized.

I don’t know about you but sounds like a line of credit to me.

Anyway, the whole point here is that a survey of financial advisers in the UK indicated that 80% of them stated that their clients had been refused overdraft facilities or seen the overdraft facility reduced due to tighter credit. As a result, many advisers are directing their clients to invoice factoring and invoice discounting as alternative means of financing.

A representative of SME Invoice Finance said: “Many established businesses are turning to invoice discounting for the first time. Encouragingly, advisers are seeing the critical role that invoice discounting plays…”

The CEO of the Asset Based Finance Association (ABFA), commented: “I am delighted that invoice finance is at last taking its rightful place as the first choice product for working capital funding.”

Ok, sounds like a smackdown brewing between SME and the ABFA with one obviously advocating for invoice discounting while the other is championing invoice financing.

Are you ready to rumble?

Coming soon: Invoice factoring vs. invoice discounting. What’s the difference?

First of all, who the hell is CIT Group and why are we paying so much attention to them? This is one of the beautiful side-benefits of the current economic woes – we are finding out who controls the money and credit in this country. Who would have ever expected that AIG is an economic linchpin of the U.S. economy? Not until their involvement in the so-called toxic assets did I have a clue that AIG did anything but provide insurance.

Now we are finding out that there are hundreds of companies that will be in big trouble if anything happens to CIT Group. Why? Because CIT is one of the largest receivables factoring agents in the U.S. As a matter of fact, an article in the Los Angeles Times about CIT indicates that a whole pile of companies that supply Target and Walmart will be in deep doodoo if CIT declares bankruptcy. CIT keeps many of these manufacturers afloat with invoice factoring and some major retailers will suffer if CIT isn’t there to keep the cash flowing.

Another thing that I learned about CIT is that they are heavily involved in the home furnishings industry. I was a former marketing manager in this industry and really had no idea that CIT was a player. But, according to Furniture Today, a lot of domestic furniture manufacturers rely on CIT for factoring services and financial problems for CIT mean financial problems for the home furnishings industry.

As I’ve said, the economic problems we are facing have plopped factoring squarely in the spotlight as a critical financing resource. Too bad that so much damage is being done as awareness grows.