When it comes to making credit determinations, factors say it depends on the people making the decisions. But is it an art or a science? Factors say both.
or factors, companies that handle suppliers’ receivables for a fee, determining how much credit to extend to their clients is a blend of art and science. Being able to make those judgments quickly has become more of an issue as the pace of businesses has increased.
Despite this, determining credit still boils down to the factors’ relationship with the people making the decisions, which is just the way they like it.
Even with advancements in technology, factors don’t believe a computer program or any other system could produce a true picture of a company’s creditworthiness.
“Our view is that when you take the human element out of the equation, it doesn’t work,” said Stanley Officina, president of Sterling Factors. “When you start trying to force companies into a formula you are not doing them or yourself justice.”
Michael Stanley, executive vice president at Rosenthal & Rosenthal, echoed this sentiment. “We don’t have a formal rating scale like banks do. That means when a client comes to us and they need something, we can respond to them quickly.” Furthermore, said Stanley, clients want to know decisions are going to be made based on their particular situations and not by a predetermined set of standards.
With today’s focus on bottom-line financial results, many of the factors say the first thing they look to when considering a new client are the people behind the company.
“First, we look at the management team and their experience to find out just how good they are at what they do,” said Thomas Pizzo, president and chief executive officer of Wells Fargo Century.
After all, pointed out Stanley, “If there’s a problem, it’s the management that gets you out of that problem.”
“The first thing you really look at is the background of the principals,” said Officina. “You make sure they’re not Jack the Ripper and that they’re legitimate.”
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Prospective clients need to be a good fit for the factor, as well. “Our expertise has always been importers,” said Pizzo. “That’s our strong point and that’s where we get our referrals from in the market. We’re capable of understanding it and financing it.”
According to Officina, Sterling focuses its business on start-ups and those companies with shipping volumes of less than $50 million. “It’s kind of like shopping for the right pair of shoes — we don’t make a size 8 foot fit a size 7 shoe.”
According to Stanley, Rosenthal works with clients with shipping volumes that range between $5 million to $250 million. “You really have to understand what their business is trying to achieve.”
After determining their comfort with the type of businesses being conducted and the people behind it, the factors delve into the financials and set out to learn about the client’s other relationships. While generally having access to a company’s financial information, a large part of the decision hinges on the factors’ ability to evaluate the company’s relationship with others in their field.
“As a factor or asset-based lender, our number one exit strategy is the quality of the collateral we lend to,” said Mark Bienstock, executive vice president of DCD Capital. “We need to understand and closely monitor the accounts receivable and inventory of our clients.” Issues such as sales concentrations, seasonality, type of inventory and the company’s historical financial performance all come into play, said Bienstock.
“The science is determining whether a client has adequate capital to finance their business plan,” said Pizzo. “Experience is key. You have to have the ability to find out as much as you can from your industry experience. That’s an art that you have to have within your organization.”
There are some basics that every factor examines, said David Milberg, president of Milberg Factors. “There’s the financial condition of the customer, the financial outlook for the customer, where they stand with other lenders, the kind of credit they’re getting in the marketplace.”
When clients seek to sell to retailers that may be in a less-than-desirable financial position, a strong relationship becomes even more important.
“When a client is important to us, we have the ability to take risks that some of our competitors won’t take,” said Milberg. “We’ve been able to put on new business by selling our service, not just by slashing rates. The first part of service is what kind of approval we’re going to give clients.”
Milberg believes that his firm’s success is a result of being focused on the factoring market. “Factoring is not one of 10 different business lines in our company,” said Milberg. “If your portfolio gets too large, it’s harder to make individual decisions for individual clients.”
Officina points to problems that arose when Barneys New York was on the brink of bankruptcy, several years ago. “At the time, young design companies had to have their goods in Barneys,” said Officina. “The factor would make an accommodation to a client and approve a portion of an order simply because of the relationship, even though you knew the credit was going to be a problem.”
Situations like these are more about a gut feeling than anything concrete, according to Officina.
“You get all the relevant facts on the table and you have to make a judgment,” said Milberg. “If the process by which we make the decision is a sound one, we don’t second-guess the decision.”
The relatively small size of many of the companies that factors deal with also lends itself to a more personal relationship. “You’re not dealing with Fortune 500 companies on a daily basis,” said Pizzo.
The basics of determining credit haven’t changed all that much, according to Officina. Ultimately, factors have to make a decision and go with it, and it’s always a gamble.
“At the end of the day, the two most important issues are the quality of our collateral and the character and capacity of the individuals that we are dealing with,” said Bienstock.