NEW YORK — In a consolidating market, which leads to vendors having high levels of sales to just one or two retailers, the pressure on a supplier’s business operations can be enormous — especially if a company is seeking to grow.
Moreover, a consolidating market means increased levels of risk for vendors, whether that vendor has $500 million in sales, or just $5 million. One way companies mitigate some of the risk is by hiring a factor, which is a firm that handles a company’s accounts receivables for a fee.
Michael Stanley, executive vice president of Rosenthal & Rosenthal, a New York-based factor, said the reasons vendors turn to a factor vary. For example, Stanley said his factoring business tends to pick up when retailers are experiencing softer sales or when they get close to filing for bankruptcy.
The vendors that sell to these distressed retailers get a little scared, and turn to factors to mitigate some of the risk. The factors are able to handle the accounts receivables because they have a deeper knowledge of the retailer’s creditworthiness.
David Milberg, president of Milberg Factors Inc., based in New York, said “regardless of consolidation, I think factoring is a terrific product.”
Milberg’s enthusiasm stems from an increasing number of companies looking to protect themselves from high levels of “sales concentration,” which are sales to a vendor’s one or two largest retailers. According to vendors, sales concentration levels (in regard to sales to a vendor’s single largest retail customer) have increased from about 20 percent five years ago to about 40 percent today. Sales concentration levels to a vendor’s two or three largest retail customers is about 60 percent, according to industry estimates.
This risk, or exposure, in having high sales concentrations is only magnified in a consolidating market. And this is especially true when two retailers of a formidable size merge. Of recent concern is the acquisition of May Department Stores by Federated Department Stores, and Kmart Holding Corp. buying Sears, Roebuck and Co.
“If you have twice the dollars in one customer, you have twice the exposure,” Milberg explained. “A client that did business with both retailers is now going to have more exposure in the merged retailer. The prudent thing to do is get credit protection on those receivables.”
Related Articles
You May Also Like
Thomas Pizzo, president and chief executive officer of Wells Fargo Century, agreed, and said there are other reasons vendors turn to a factor.
“A company should come to the factor when it makes sense for them to outsource the back-office work,” Pizzo said. “There are people factoring that have sales of $500,000 to $500 million a year. It’s a very versatile service. Most of these people want to worry about designing, sourcing and selling — not bookkeeping. It’s always been the best service that a manufacturer could take on. It’s not a fixed cost.”
Factoring typically involves a supplier shipping goods to a retailer. Through an arrangement with the factor, the supplier is paid by the factor for the shipped goods. The factor bills and collects the money owed on the goods from the retailer. And for handling the transaction and doing the bookkeeping, and paying the suppler for the shipped goods, the factor charges a predetermined rate.
Factoring arrangements are sometimes done without recourse, which means the factor takes on the credit risk. Factoring can also involve vendors getting paid as soon as the goods are invoiced.
The types of services factors offer vary, fitting the needs of a vendor regardless of their yearly sales. Typically, factors handle a firm’s full accounts receivables, which can reduce costs and write-offs while increasing cash flow. A full-service factoring product is something vendors consider when they are looking to grow their business because it allows them to focus on other areas of their business such as designing products, sourcing and selling goods. Several of the major factors will also lend money by issuing asset-based agreements.