The Factoring Force BIG Blog

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.

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.

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!

Wade Henderson of http://www.IMMFinancial.com has crafted an article that places the dilemma of the smaller businessperson relative to the plight of the corporate giants that are in financial trouble. Wade indicates that the “Big Players,” as he calls them, have the advantage of turning to the government when things get rough and they need some assistance.

The “little guy,” however, has no one that is eager to help them out considering that there is no major ramifications if they fail. A few jobs and some tax revenue loss. No big deal. But if Citigroup fails, we’re all doomed. So, who’s there for the little guy.

No one.

Banks don’t want to help because they are now completely risk averse. So if a smaller business needs help staying afloat, the primary lending institutions are too busy keeping themselves afloat to worry about Ma and Pa and there 15 person printing company.

But receivables factoring companies are an option for these smaller concerns when the banks that are being bailed put, bail out on the little guy. By factoring receivables, a company can let the assets already on the books go to work for them now. As factoring companies purchase these invoices the company receives an expedited infusion of cash and gets to keep the wheels of small business industry turning.

Small business is responsible for something like 80% of the new jobs created over the last decade. And if the traditional lending institutions are going to ignore the Little guy then the little guys will work around them. Factoring receivables is one way to make a detour around the Big Players.

In some rather astonishing comments about the place of factoring in the current recession, Stephen Troy, the president of AeroFund Financial, Inc., stated that “Factors and asset-based lenders are in an unprecedented position to capitalize on the tight credit markets right now. So much so, that this recession may just be paradise for some.” He also described the recession as “Nirvana” for specialty lenders.

Paradise? Nirvana? How many industries are hearing this sort of gushing assessment of their prospects during the worst economic crisis in over 80 years? But, according to Mr. Troy, “asset-based lenders and factors are sitting in a surprisingly strong economy with lots of wounded competitors” and this translates to unprecedented opportunities.

In Mr. Troy’s opinion, there are a lot of companies with a desire to expand and grow and the banking industry is not in the position to help them. Entrepreneurs will seek to start businesses and banks will be reluctant to provide loan services. The “specialty lenders” will be there to do the job that the banks can’t or won’t do. Factoring companies will be able to do what they do best…put cash in the hands of business owners quickly so the business owner can stay solvent and expand.

The recession is a disaster for many. Everyone is eager for some good news in a bad times. Why shouldn’t it be about us?