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!

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?

Shame on me! I haven’t posted in way too long. I’m sure that I have been missed terribly by the visitor that may have accidentally stumbled upon this blog while looking for information about factoring polynomials or some such unrelated topic.

Anyway, true to my catty and petty self, I came across a blog post about receivables factoring that I thought was quite interesting, if not a bit too honest.

A recent post on a blog titled “Factoring Vibe” introduced the background of the post author which was, to say the least, incongruous with the profession which the author now inhabits. The author is quite forthcoming about her lack of knowledge of the world of finance, economics and asset-based financing. In fact, I am wondering if she is not a bit too forthcoming.

The post author identifies herself as a highly-educated writer, acting enthusiast and all-around artsy-fartsy type. But we soon discover that, not only is the author not just some hired-hand writer, designated to churn out relevant blog posts targeting the factoring industry, she is the company’s marketing manager.

“So what?” you ask. Well, consider the following statement:

“So here I am, in charge of marketing for a financial company, with very little understanding of this industry.”

And this:

“Being a writer by trade, the company I work for, Universal Funding, thought it would be a good use of my skills for me to write a blog about topics relevant to the financial industry. Sure, no problem, other than the fact that I know nothing about the subject.“

It sets me to wondering about the hiring process for this position. What in the world was the interview like?

Universal: So, can you tell me about your experience in the financial sector?

Candidate: Well, I was treasurer for the drama club at my college. Oh, and I accidentally balanced my checkbook once!

Universal Funding: Balanced? To the penny?

Candidate: Yes, to the penny!

Universal Funding: Damn! You’re hired.

Forgive me, but I can’t help notice things like this. Perhaps I am evolving into the Perez Hilton of the receivables factoring industry. But let’s face it. This industry could use a little personality.

And speaking of personality, check out these two personalities from Universal Funding. Henry D. Wozow is the President and Founder of the company. His bio states that “as a young man, Henry was the California Amateur Welter Weight Boxing Champion, with 168 fights under his belt, and 19 fights as a professional.”

Ouch! In other words, don’t make Henry mad. He’ll kick your ass.

Another interesting character is Senior Vice-President and Sales Manager Deron Nicholson. Frankly, I don’t ever remember seeing a corporate photo representation of an executive in a really cool, low-set “jeff cap.” Upon reading that Deron is a former U.S. Marine, I am starting to appreciate that he and Mr. Wozow are 3,000 miles away. They could hurt people.

While the last post introduced Receivables Exchange and the new concept of bidding to be the factor for a company’s receivables, the same Wall Street Journal article presented another factoring related service presented by FTrans Corp. in Atlanta.

FTrans is addressing an issue which keeps many banks from participating in receivable factoring and that is evaluating the invoices being presented for factoring. The article mentions that most banks are not set up to monitor and evaluate the invoices presented for factoring. The way it works is that a company seeking to receive a line of credit from its bank posts its invoices on FTrans. The invoices are evaluated and confirmed and the bank then has the information it needs to determine whether to provide financing against these receivables.

What FTrans does, essentially, is to open the door to banks to pitch another service to their business customers without having to staff an entirely new department. Based on the feedback provided by FTrans, the bank determines what percentage to advance against the invoices and what fee to charge.

This goes back to some of my earlier comments that banks are taking notice of the amount of business out there for receivables factoring. Companies like FTrans are making it easier for them to become involved which just increases the amount of competition for the factoring industry.

Next up… how smaller companies can get lower rates on their receivables financing.

Shame on me! I don’t know how I missed this but an article in the Wall Street Journal online edition just introduced me to Receivables Exchange, LLC. This company is described as the eBay of receivables financing and it may be a serious and threatening entry into the world of factoring.

The article describes the plight of a company called Data Drive Thru, Inc, a software company that had introduced a successful product but was having trouble generating the next round of capital funding due to the banking crisis. The company decided to leverage its hefty portfolio of receivables from some very well-known and reliable office supply retailers. But instead of shopping around for a factoring company, Data Drive Thru turned to Receivables Exchange where they posted their invoices and let anonymous lenders bid on the receivables.

Whoa, daddy! Anybody but me see some pretty significant implications for the receivables factoring industry here?

There were a couple statements that caught my attention in this article. First, the title of the web page is “Borrowing Against Receivables Gets Cheaper, Easier.” I think after reading about Receivables Exchange I don’t need to comment further.

Here’s another one…“Borrowing against receivables isn’t new… But with interest rates sometimes exceeding 30% or 40% annually and tales of unsavory business practices, this small corner of finance is considered by many to be a funding source of last resort.”

Translation - “Factoring receivables is really expensive so avoid it at all costs”

There are a couple more innovative programs with implications for the receivables factoring industry profiled in this article. I’ll get into them in the next two posts.

I like to present information about receivables factoring that is not simply another explanation of what asset based factoring is. I prefer to find out what is going on in an industry that is global in scope and integral to the profitable operation pf businesses large and small. Trust me, it ain’t easy!

I skim through article after article and blog post after blog post authored by the same self-promoting factoring experts practicing search engine optimization by getting the term “invoice factoring” or “factoring receivables” linked to their website as many times as possible. It would be nice to see a fresh approach to the topic though maybe there just is not that much interesting to say.

That being said, I know that there are thousands of business owners out there who may or may not be familiar with factoring or may be under a misconception about the pluses and minuses of invoice factoring. Tracey Z. Rewey is forced to go through the exercise of explaining, once again, what factoring is in an article appearing on Entrepreneurs Community titled “Recession Proof Your Business – 10 Benefits of Factoring Invoices.” This is one of those lists that a business owner can pin up on their office bulletin board and when they find themselves thinking, “Now why should I be thinking about factoring my invoices?” they can simply look at this list and answer, “Oh yeah, that’s why!”

One question I have though. Is it really possible to “recession proof” your business by factoring? After all, isn’t the ability to factor contingent on having receivables to factor? And aren’t these receivables contingent on a sales transaction? And isn’t a sales transaction contingent on a customer having the financial wherewithall to actually make a commitment to purchase?

Hmmmmm? Kind of makes your head hurt doesn’t it?

Two factoring industry veterans have expanded their invoice factoring services to other asset-based financing vehicles as they capitalize on the reduced number of funding source for small businesses. The pair has launched a new website at BusinessFactors.com.

This is just one more example of the ability of factoring companies to bring solutions to business that were either misunderstood or below the radar. As the big boys of the credit industry look to government to keep them afloat, the stalwart members of the receivables factoring industry keep plugging away by building awareness of the value of assets already owned and the advantages that these assets present. As a matter of fact, I’ll bet a lot of companies are gaining a whole new appreciation for the existence of “accounts receivables.” For the most part, these have been viewed as money owed rather than as assets due. Now those assets can be applied to keep a company afloat.

A whole new appreciation of what’s on the P&L isn’t it?

According to the Commercial Finance Association (CFA), asset-based lending experienced only a slight decrease in the final quarter of 2008. The CFA did not find this surprising or disconcerting in light of the dramatic growth in asset-based lending during 2008. Essentially, the CFA views the industry as quite stable compared to standard leding institutions and the rest of the economy. Andrej Suskavcevic, CEO of the Commercial Finance Association, actually referred to asset-based lenders as “a lifeline for the global economy.”

Asset-based lending is the practice of extending funding to a business based on using existing assets as collateral. It is normally utilized by companies that are highly leveraged financially and have limited cash flow. Typically, the types of assets used as collateral are accounts receivable and inventory. Each of these assets has a fixed book value and factors will fund about 80% of this amount providing cash to a company faster than normal lending channels. However, the cost of leveraging assets is generally higher that a traditional commercial loan or line-of-credit. But even with these higher costs, asset-based lending has become an important method of providing small businesses with the opportunity to stay cash healthy as they move forward and grow their businesses.

I love the “lifeline for the global economy” reference. Who would have ever thought that asset-based lending would save the world!