Most factors are looking ahead to a good
year in 2010. They are benefiting from
new clients, expansion into new industries and less competition. Many factors
remain strong, despite the struggles of a
few. In fact, when looking at factoring’s
future, it’s helpful to look at its past. Over
the past 30 years, we believe there has
not been a single case where a major factor has filed for bankruptcy — and that is
indicative of the underlying strength of
the factoring business.
Although CIT dominated industry news
and raised concerns in 2009, it’s important to note that the firm’s issues were
primarily concentrated within the parent
company’s other business units and not
the factoring division.
To be sure, there has been a shakeup in
the industry. Some factors have experienced liquidity issues due to the tight credit markets and lender-imposed restrictions.
Industry consolidation has also narrowed
the options available to clients.
The factors that had adequate access
to capital were in a much better position.
As demand exceeded supply, they had
the ability to be more selective in client
acquisition and achieve higher margins.
Subsequently, rates and fees rose because
economic conditions increased the workload and level of risk. For most factors, this
has translated to justifiable rate increases
for both existing and new customers.
Access to Capital
In 2009, the tightened credit markets and
escalating cost of funding placed an added
burden on factors that rely on third-party
sources. This had an impact on earnings,
the ability to grow and in some cases retain clients. Conversely, factors with ample
credit lines had a clear advantage.
Access to capital is a decisive advantage
on another front. It can also be put to good
use with strategic acquisitions. These opportunities can add an entire new area of
expertise or geographic exposure as well as
new sources of profitability. For example,
last year, Sterling acquired the business
lines of DCD Capital and DCD Trade Services. DCD’s client base was primarily rooted
in the South Asian community and thus
opened new doors in a growing market.
Though the initial benefits included the
increased business and profits, longer-term gains encompassed new staff members who had expertise and strong ties
to communities with which Sterling had
limited experience. The ability to literally
speak the same languages and network
easily was extremely valuable in expanding its client base.
Sterling’s acquisition brought with it
a large letters-of-credit business. Their
international contacts and expertise in this
area integrated perfectly with Sterling’s
existing international department, which
specializes in letters-of-credit transactions.
None of this would have been possible
without a solid financial foundation and
substantial capital resources.
Ability to Service New Business
One of the dangers of rapid growth for any
business is being unable to take on new
customers. Factors are no different. Turning business away as a result of carefully
applied screening and due diligence is one
thing, but turning new clients away due to
lack of capacity is a situation no business
entity ever wants to encounter.
Though factoring is a large industry, it is
close-knit and word travels fast. Competitors and clients alike quickly hear of factors
that are struggling with capital constraints
or are for sale. Any concern about a factor’s
financial viability can cause companies to
seek out more reliable financing partners
with deep resources and strong reputations of stability. However, complicating
this “flight to stability” is the reality that industry consolidation over the past decade
has left a smaller pool of stable factors. This
creates a situation where some factors can
readily leverage their strengths and capitalize on increased opportunities.
A Solid Business Model
Overall, consistent use of appropriate
analysis and due diligence for every
prospective client is a standard procedure for factors that demonstrates true
lasting power. This has been increasingly important as companies struggle
through the recession.
Factors also have a prime opportunity
to expand their markets. There is an entire
untapped market outside the “traditional”
(apparel and textile) industries that could
utilize factoring. Active outreach and
marketing can raise awareness among
companies that are looking beyond their
usual sources of credit (such as banks and
commercial lenders), which may have
As factoring companies continue to grow
and at the same time consolidation within
the industry continues, one of the major
challenges will be managing increased
credit exposures with the major retailers.
This issue is not new, but it appears to be
a growing concern as exposures expand
to unprecedented levels. This serves as another reason factors should diversify into
other industries. However, factors are being
more selective in new business acquisitions
in order to manage exposure levels and
ensure that deals are properly priced.
All in all, factoring continues to be very
much in demand. As conditions stabilize,
the factoring industry as a whole has the
potential for a banner year in 2010. TSL
John P. La Lota currently serves as president
of Sterling Factors Corporation, a division
of Sterling National Bank, located in New
York City. He has been with Sterling for ten
years, and a factoring industry professional
for nearly 30 years. Prior to joining Sterling,
La Lota held positions at Heller Financial and