The Factoring Force BIG Blog

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)

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?

Well, bust my buttons! Here I was cattily pointing out the incongruity of having a marketing person for a factoring company admit that they didn’t have much in the way of actual knowledge about economics, finance and, well, factoring.

Well I must recognize a quick study when I see one because this same marketing person at Universal Funding has put up a blog post about the actual cost of invoice factoring that I can truly appreciate.

Frankly, a lot is written about the cost of factoring that would lead you to believe that receivables factoring and loansharking occupy the same level of credibility within credit and financing circles. The post at Universal Funding’s blog does a good job of outlining the costs and putting the costs in perspective with other practices.

This is an informative read and I recommend it. Not that this will carry much weight.

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.

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!

In yet one more step towards gaining full acceptance as a valid and viable method of financing, the practice of receivables factoring was fully embraced by a bank in South Dakota this week. First Bank & Trust, of Madison, SD, has launched FirstLine Funding Group, a freight factoring entity which will operate as a division of the banks commercial lending group.

The division is being staffed by a team of seasoned freight factoring veterans and will service trucking firms and independent truckers nationwide. While the focus is esclusively on factoring freight invoices at the moment, the group will likely expand into servicing other industries in the future.

When a bank introduces a receivables factoring division, it is another clear indication that the mainstream financial sector is realizing that invoice factoring is a truly legitimate financial service and not just some shady financial scheme targeting poor credit risks and desperate business owners.

I am reminded of a similar relationship within another industry. I liken it to the way the healthcare industry has viewed massage therapy for a very long time. Massage has been practiced since ancient times, not just as a method of stress reduction but as a serious healing practice. But as modern medicine evolved, massage became just another one of those alternative medical practices that was offered in gyms, spas and chiropractic offices. It was the poor man’s physical therapy.

But nowadays, there is more acceptance of massage therapy as a valuable healing tool and more and more therapists are being employed in what is now termed medical massage. Many a doctor’s office will now have a therapist on staff and will prescribe their services a s part of a treatment program along with medications. Massage has moved out of the realm of healthcare voodoo and into the limelight of the medical community.

As evidenced in Madison, SD, receivables factoring is also edging into that type of limelight. I predict that more and more banks will begin offering factoring services. And banks do need all the help that they can get.

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?

In a rather astonishing turn of events, the under-the-radar industry of receivable factoring is flying well above the radar and right into the mainstream during these tough economic times. An article published on Yahoo Hot Jobs website by Joy Victory, of Payscale.com (Joy Victory? Seriously?) identifies factoring as one of top professions during the coming year. The article, titled “10 Hot Professions for 2009,” states that the recession is making factoring an attractive option, especially for smaller businesses, since business are so much harder to come by.

Not only is accounts receivable factoring a “hot job,” it is apparently a quite lucrative one also. Ms. Victory states that the average yearly salary for a factor is nearly $80,000! It was the single highest salary for the 10 professions cited in the article.

Now everyone will want into the act.