We hear a lot these days about companies that are too big to fail. Appears that CIT is not too big to fail but is too big to go into bankruptcy without causing a lot of chaos for its factoring clients. (Image courtesy of European Pressphoto Agency)

According to an article in the Wall Street Journal online edition, the

upcoming restructuring and likely bankruptcy of CIT may have a serious impact on the thousands of small-to-medium size companies that make up the factoring client base of CIT. The reason? Cash flow.

Apparently, the very issue that receivables factoring is designed to address is the problem CIT may have after restructuring. After all, invoice factoring for small businesses provides the cash flow that would not be forthcoming quickly after invoices are issued. If CIT doesn’t have cash after settling with its debtors, then how can it purchase the invoices of its factoring clients and provide the needed cash?

There is something utterly ironic here, don’t you think? So who factors for the factors?

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.

It continues to fascinate me that receivables factoring has such a prominent and public profile in Asian and European countries. While it seems to me that most of what you read about receivables factoring in the U.S. is purely self-promotioanl by factoring companies, the financial news from overseas regularly mentions asset-based factoring as a component of a corporate profile or as an integral element of some type of major capital funding initiative.

Case in point… I read a press release today that announced that China Security and Surveillance Technology, Inc. (CSST) was awarded a contract tp provide some type of service in the development of what is called an E-city in Nanjing, China. An E-city, as I understand it, is a type of infrastructure designed to support a variety of digital support services for the growing technological needs of businesses, government and citizens. (Of course, I may be understanding it entirely wrong but this will do since it is only incidental to my primary point of interest.)

What struck me in this release was the quite specific role that receivables factoring would play in the financing of this project for CSST. The release states:

The project’s construction will be subjected to specific installation arrangements separated
into several phases, and corresponding revenues will be recognized upon
completion of each phase. In addition, the Industrial and Commercial Bank of
China (”ICBC”) will provide accounts receivable factoring service and working
capital financing facilities for each phase of the project.

In other words, ICBC will be factoring the invoices that CSST passes on to the Chinese government and making sure that CSST stays solvent while they await payment. That’s pretty blatant stuff.

Later on in the release, the CEO of CSST states:

As we had firmly established cooperation with large
Chinese local banks in the past year, we are confident in our abilities to
undertake big projects and believe that the receivable factoring agreements
will fully satisfy our working capital needs. In addition, as we continue to
push ahead with our bids for larger government contracts, we believe that the
factoring agreements and other financing arrangements will continue to serve
as strategic advantages and key factors in winning our bids.

The CEO is pointedly crediting factoring as an essential “factor” in enabling CSST to be competitive and land large government contracts. Somehow, I wonder if this sort of frank declaration would be viewed bu U.S. financial agents as a positive or negative.

Maybe it’s a cultural thing.

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 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?

I read a press release from IFG Network that announced that their 4th Quarter 2008 accounts receivable financing increased 40%. The company did not indicate whether the +40% was vs. the prior year or the prior quarter. Because IFG provides invoice factoring to construction companies, one of the assessments of this development was that it may be signaling some positive momentum in the housing market.

Now I would hope that this is true. It would be nice to read any financial tea leaves that seem to be predicting renewed strength in the economy. However, based on the information contained in yesterday’s post, in which the CFA stated that increases in receivables financing was up due to a tight credit market, I found myself wondering if the statements by IFG were on target or not.

Granted, a 40% increase in extended credit is a positive thing for a financing company. But is that really an indication that things are improving in the housing market or is it simply a further reflection of the difficulty that any business is having obtaining credit through mainstream banks and lenders? It’s not like new home construction has altogether ceased. Many building projects continue and it is likely that more would be happening if credit were more readily available. But it seems to me that many builders may be leveraging current assets to keep some activity going and move existing projects forward.

I hope that IFG is correct. We could use some good news. But I’m not certain that IFG’s strong performance in the 4th Quarter is as much an indication of a revitalized housing sector as it is of a still constipated credit pipeline.