Factors keep factories rolling in garment industry.

Factors keep factories rolling in garment industry By Bob Howard Each year in Los Angeles, hundreds of businesses raise millions and perhaps billions of dollars through a relatively unknown branch of commercial finance that was providing funds for under-capitalized companies long before high-tech wizards began to court the barons of high finance to raise venture capital.

Most of the businesses trying to raise these funds are in the garment industry or some closely allied business. They raise the funds through companies called factors, which specialize in buying or lending money against accounts receivable.

"Factoring could fit into lots of other industries, but the factoring industry hasn't pushed to expand into other areas," says Philip Reinle, senior vice president of Congress Talcott Corp., the factoring subsidiary of Congress Financial Corp. Robert Tenney, head of the parent company, says factoring as an industry "is hundreds of years old and goes back to medieval times, to the early trading companies."

David Rubin, president of Republic Factoring Corp., says factoring began in the United States among early cotton traders, known as commission merchants, who financed cotton growers. Rubin points out that factoring is often confused with asset-based lending, a related branch of commercial finance that lends funds to businesses on the basis of their accounts receivable.

A factor buys a company's accounts receivable and then either provides money on the date the invoices come due or advances money before the invoices come due. An asset-based lender lends money using the accounts receivable as collateral, but the big distinction, Rubin explains, is that "The asset-based lender assumes no responsibility for collecting the accounts receivable."

Most factors have so many different kinds of arrangements with their clients, Reinle and Rubin say, that no one definition thoroughly explains factoring.

But in general, most large factors charge a commission of about 1 or 2 percent of the total dollar volume of the invoices they buy -- unless they advance money before the invoices are due. When they advance funds -- usually up to 80 percent of the value of the invoices -- they charge interest of about 2 or 3 percent above prime rate.

Not all companies use factors as sources of funds, however. One of a factor's primary business functions is determining the credit-worthiness of its clients' customers, and companies that don't need factors as a source of funds often hire them on a fee basis for their credit operations.

"There are instances where a client will grow to a size where he goes public, but he still doesn't want to maintain his own credit services," says Rubin.

Says Jeff Hamilton, owner and designer of Jeff Hamilton Inc., a Los Angeles-based manufacturer specializing in men's and children's wear, "A factor does all the credit checking. If I weren't factored, I would have to have a whole staff to do that." Hamilton says he has used a factor ever since founding his firm in 1983.

"The first advantage of having a factor is that they make background checks we're not equipped to do. The second is that it's like having insurance our customers are going to pay us. The third is the cash flow," Hamilton says.

Factoring has been mainly the domain of the garment industry, Tenney says, because the garment industry traditionally has been undercapitalized. According to Reinle, "at least 95 percent of all business in factoring is done in the apparel industry," although some electronics firms and a few other industries use factors occasionally.

Another reason for the link between factoring and the garment industry is the seasonal nature of the business. In a typical scenario, Reinle says, a bathing suit manufacturer might need funds now to build up inventory. A factor will advance funds on the basis of orders, then possibly advance funds again later on the basis of accounts receivable.

Companies like Congress Talcott and two or three other factors in Los Angeles probably handle more than $1 billion each in business each year, Reinle says, dealing mainly with clients seeking $1.5 million or more. Smaller factors provide funds to smaller companies, usually for higher rates.

Rubin estimates factoring is a $35 billion per year industry in the U.S., serving mainly the garment industry but also branching into toys, electronics, and certain specialities like importing. "There is no way that some of these soft goods companies could have grown to their current size without factoring."

Los Angeles has become a center of factoring with the growth of the garment industry here, and factors have enjoyed good years lately as a result of good times in the garment business.

"I don't think there's a factor in this industry that hasn't done well in the last year," Reinle says.

Factoring may carry a negative connotation with people who are unfamiliar with accounts receivable-based financing, Reinle says, but that's only because -- except in the garment industry -- it's viewed as a last resort for troubled companies. "I blame that (negative connotation) on us for not educating other industries," he says. He notes that one of Congress Talcott's clients is Liz Claiborne, a large and successful company that doesn't need a factor for funding. "If it (factoring) were such a bad thing, would a Liz Claiborne type of operation, which surely doesn't need funds, sign up with us?"