The Factoring Force BIG Blog

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.

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 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.

” ‘Cause I’m the tax man,
Yeah, the tax man.”

Well, here we are in June and I’m reminding you of the unpleasantness of taxes via the lyrics of the late George Harrison. Thought you were over that tax hump, huh?

I’m only reminding you because G. M. Filisko reminded me in a piece over at Bankrate.com. The article provides 6 methods that small business owners can utilize to pay the IRS for taxes due. Some of them are what you would expect to hear like “take out a home equity loan” or “put it on your credit card.” Great, just what we need…more debt!

But, wait a minute. There it is at #6. “Sell your receivables.”

Now that is novel. A small business owner avoids incurring more debt by leveraging existing assets. Seems to me that all we hear is that we are in this mess because we have incurred too much debt and saved way too little. But by factoring receivables, the small business owner can pay off “the man” and keep the business afloat at the same time. No debt. No payments. Complete solvency.

Small business factoring can address a variety of debt and cash flow scenarios. Even Mr. Harrison might take advantage.

“And my advice to those who die,
Beware the pennies on you eyes.
‘Cause I’m the tax man,
Yeah, the tax man.”

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!

I have always perceived members of the factoring industry as generally honest lot. But apparently, if the opportunity to take advantage of a circumstance involving he exchange of money is present, there is a dark heart just waiting to pounce.

Factoring receivables is becoming a more popular means of generating capital or improving cash flow and as more factoring transactions take place, more opportunities to abuse the system are devised. That is what officials are warning businesses about in Birmingham, England anyway.

The scheme is actually pretty simple. A factor is engaged and systems established to move receivables to the factor in exchange for the cash value of the receivables less the factor’s fee. The factor must then wait tro collect the balances on these receivables.

What the “bad guys” do is to create what are known as “fresh air” invoices (leave it to those Brits to come up with such a descriptive moniker), which are really dummy invoices for companies that don’t exist or for products that were not actually sold. The factor unknowingly provides cash for these invoices but then cannot collect. The directors of the company are normally liable for all the amounts due to the debtor and someone within the cpmpany skims off the cas that the factor provided.

Or, entire companies can use the fraudulent “fresh air” invoice method to defraud factoring companies. It takes a fairly complex system of deception which I won’t even bother to describe here. Suffice it to say, it’s kind of like an in-house Ponzi scheme.

Oh well, the image I have of the squeaky clean factoring indistry is shattered. But wait! Maybe this is a strictly British problem. Maybe the U.S. factoring industry is squeaky clean after all. Maybe I’ll just stop reading the news so I don’t read anything that might disappoint me.

Factoring assets. Factoring Invoices. Factoring receivables. No matter what you call it, those involved represent all that’s good and pure and virtuous about the financial industry. At least compared to those slimeballs involved in mortgage backed derivatives.

“I’ve just run out of options.” How many timed has a business owner uttered those words as he/she found themselves in a really tight cash crunch? Countless, I’m sure. But Naomi Monk of Small Commercial Mortgage Online apparently believes that there are always options.

To that end Ms. Monk has authored a white paper titled “21 Ways a Business Owner Can Raise Cash and Reduce Debt.” And among the various ways that Ms. Monk proposes to access cash is factoring accounts receivable.

Now I’d be a liar if I were to tell you that there are some brilliant tips that provide magical solutions to cash flow and debt issues. There aren’t. But when you are facing certain challenges or dilemmas, it is sometimes helpful whaen you can leverage the unencumbered thinking and professional experience of others.

So if you are staring blankly at your balance sheet and you are seeing numbers with parentheses around them that shouldn’t have parentheses around them, then you might want to download Naomi Maonks white paper. What the heck, it’s free!