By Harold I. Dundish, Senior Vice President and Division Manager for IDB
Factors, a division of IDB Bank
The landscape of the factoring business has
evolved over the past several decades. What started as family-owned businesses
buying account receivables from mills and manufacturers has turned into a
multi-billion dollar business with the entrance of banks into the market in the
late 1960s and early 1970s.
When family-owned businesses controlled a good portion of the factoring market, lending rates and commission rates were
at reasonable levels and there were no fees because the profits generated were
very good. Soon enough, the banks wanted a piece of the factoring
pie. It was a good service offering for larger lenders to add to their
financial portfolio. But the playing field changed once the banks started
offering factoring as they reduced all rates, making
it more challenging for the other players.
However, the banks began to feel the risk of the factoring
business and wondered whether it was worth the reward. In the 1960s and 1970s,
bankruptcies were considered an embarrassment - unlike today where it is
just a normal course of business. Companies were also declined for credit or
were given terms of net 10 days at most when the factors requested financial
statements in cases involving pledged inventory. Any company with a deficit in
working capital was declined or restricted on credit extension.
Textile business booming
Although the banks encountered the risks of the factoring
business, there were still many opportunities as the textile and apparel
manufacturing businesses thrived in the United
In the early 1970s, there was a constant change in the type of machinery
technology used to produce and improve fabrics, specifically in the southern
part of the country. Double knits were very popular and many businesses could
sell contracts for Bentley double-knit machines at big profits to other
manufacturers. Acetate yarn was also a highly desirable commodity at that time
as well, due to the popularity of sweaters.
"Factor vs. commercial corp."
Visits to customers were made more often because the customers were mostly
non-public companies, and many times, more credit was extended as a result of a
visit. Factors were called "factors" not "commercial
corporations" or "trade finance companies." The name has changed
over the years because "factoring" in other
industries is associated with troubled firms that need financing, and factors
wanted to develop other industries for their product, hence the reason for the
Today the industry has witnessed significant changes. For the most part, the
textile and apparel industry has moved overseas, primarily due to the lower
labor costs of producing garments and textiles in the United
States. Only a small percentage of garments
are made in the United States.
Some of the domestic production is done to facilitate quick turnaround for a
retailer; while in other cases, some manufacturers have captured a very
specific niche in the marketplace that is still possible to produce in the
States from an economic perspective.
In the past, the mills that sold to the manufacturer were the dominant part of
the factor's client base.
Today the manufacturer/importer is the factor's primarily client base and the
client's customer is the retailer. Wholesale factored volume is small. Overall,
in excess of $80 billion is factored in the U.S. Factoring
volume is still primarily comprised of apparel firms because this has always
been a very acceptable form of financing in this industry.
The factoring industry has consolidated
substantially, with the larger factors acquiring many smaller factoring firms. GMAC CF and CIT
Group are two factoring firms that have acquired many
other competitors over the years. The same is true for the retail industry, as
many have gone out of business or were acquired by others.
There are now "re factors" who are factors that give their credit,
collection and check processing functions to a larger, full service factor.
This allows the re factor to concentrate on its client base and new business
development while giving up a portion of its commission income to the
full-service factor for providing these services.
The biggest concern among factors today is their customer base - the retailers.
In the 1990s, Venture Capital firms would acquire large retail operations and
turn the balance sheet upside down. With good cash flow, there was a free flow
of credit from factors. However, in light of today's current economic climate,
there are large credit exposures on the consolidated retail customer base. As a
result, factors are in some cases restricting credit to these customers. This
is different from the situation several years back when factors were not as
concerned about the customer base as long as customer bad debts were at
acceptable levels. Today, factors are charging a premium for certain higher
risk retail customer credit exposures.
Factors are in an economy that they have never before experienced. With some of
the most reputable old-line household name firms getting into serious financial
difficulty, everyone is extra careful and diligent as they navigate through
these turbulent times.
Harold I. Dundish is senior vice president and division manager for IDB
Factors, a division of IDB Bank