Lending crunch could boost factoring: asset-based lenders and factoring firms see uptick in business as small and upstart vendors look beyond traditional banks that focus on cash flow.
NEW YORK -- The lending crunch sparked by last year's subprime meltdown could actually be a boon for the retail factoring business as vendors that have historically used traditional bank lending are forced to seek other trade finance alternatives.
"When there is concern about credit, conventional lenders tend to tighten up," said Michael Stanley, managing director at Rosenthal & Rosenthal. "As a result, borrowers migrate toward asset-based lenders and factors. It's happening now; we are seeing an increase in new business activity in our new business backlog," he added.
Factoring firm Westgate Financial has also witnessed an uptick in business from vendors that are no longer able to attain traditional bank lending. Smaller vendors and start-ups are finding it difficult to secure bank lending, steering them toward factoring firms.
"We are seeing a lot of smaller start-ups in electronics and housewares turn to factoring," said Mark Bienstock, senior vice president at Westgate Financial. He explained that due to the current tight credit environment, banks are now particularly wary about lending to upstart vendors. "Banks are more choosy in lending due to the drying up of the credit markets," he said.
Factoring firms tend to be able to offer vendors greater availability than traditional bank lenders, especially in times of tight credit markets, as they look beyond cash flows when lending. "Asset-based lenders and factors look at receivables and inventory, and can create more availability for a company to borrow when things get tighter and when they have been traditionally borrowing against cash flow," Bienstock said.
Because factoring firms look beyond monthly or quarterly cash flow and examine daily receivables when lending to their vendor clients, they are able to better gauge a vendor's liquidity.
"We are dealing every day with receivables; we have a very good sense of how a company is doing based on trade flow," said Don Morrison, executive vice president of commercial services at GMAC Commercial Finance. "The traditional lender is looking at cash flow and [the vendor's] borrowing base, which tends to be a month old," he added.
Vendors that operate within the more troubled consumer sectors such as home furnishings and apparel may "get a cool reception" from strict asset-based lenders amid the difficult environment, Morrison said. "With economic times the way they are, these industries are struggling in the retail side, so they are a little less qualified for traditional asset-based lending," he said. He added that GMAC Commercial Finance has also witnessed an uptick in business due to this search for new lending vehicles and the company expects an increase in volume this year. He declined to provide specifics.
Capital Business Credit President and Chief Executive Officer Andrew Tananbaum, said that credit crunch aside, traditional banks this year may shy away from lending midmarket vendors that operate in difficult segments due to the troublesome retail environment and fears of a possible recession.
"My general viewpoint is I think we will see a pickup in new business as [traditional banks'] clients prepare and deliver financials for 2007 to the extent that these financials show a year-over-year deterioration in performance," Tananbaum said. "There is the possibility that some will feel the pressure from banks who will not work with them as much as in the past given the clients' change in circumstances."
Trade finance has been a "bread-and-butter" business for traditional banks, Tananbaum said. He added that banks may now not be as aggressive in pursuing this business as factoring firms, which are more concerned with collateral than cash-flow statements.
Vendors who have not had to seek out credit insurance or factoring in times of more benign credit losses may now be pursuing these services, Tananbaum said. "They will want to consider pursuit of that type of coverage, because they don't feel equipped to evaluate customer credit in this environment."
While Tananbaum declined to disclose specific 2008 factoring volume expectations, he expects growth to stem from new business, which could offset slower growth from Capital's existing portfolio.
Milberg Factors is also looking forward to a year of growth due to an influx of new borrowers. "We are very well positioned to take on new accounts ...," said Milberg Factors President David Milberg. He agreed that vendors that have been able to use traditional bank lending in looser markets are now finding factoring and asset-based lending "more favorable."
Many banks and mortgage companies, because of their free and easy lending practices in recent times of historically low interest rates, helped to facilitate the current credit crisis. However, these were not the only lenders that may have stretched themselves too thin. While a number of factoring firms may be better positioned to lend in the current environment, "there have been some lenders that overextended themselves on the factoring side [last year]," Milberg said.
Traditional banks may be more cautious in regards to lending in these strained economic times and the difficult housing environment, but CIT Commercial Services sees bright spots in various "pockets" of retail. "We remain optimistic for 2008. However, rising fuel prices continue to have an impact on consumers' disposable income. But within each industry, pockets of strength always appear," said John Daly, president of Trade Finance at CIT. "Many of the people who bought homes over the past five years are still furnishing and decorating them, driving sales of furniture and home furnishings."
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|Title Annotation:||business & finance|
|Publication:||HFN The Weekly Newspaper for the Home Furnishing Network|
|Date:||Feb 11, 2008|
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