The Factoring Force BIG Blog

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!

” ‘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!

Whenever I am reading about the advantage and disadvantages of invoice factoring, one of the first negatives mentioned is the expense. Of course, the alternative being considered is normally some sort of loan and the comparison is invoice factoring vs. a business loan.

Ozark Capital has published an article addressing this topic and the author makes a pretty good case for the advantages of factoring. But one of the premises that I find a bit disconcerting is that the author seems to take the position that a business loan is preferable to invoice factoring because he/she states that factoring is something to be strongly considered after a business owner has been turned down for a business loan. I would like to do a post in the near fiyure that compares the actual out-of-pocket costs for these two methods of financing.

One intriguing position in the article presents a scenario where it is actually a financial disadvantage to avoid invoice factoring. The author refers to this as “incremental profit analysis” and measures the cost of factoring vs. the financial opportunity missed by not factoring. Very good point!