NEW YORK — Businesses strapped for cash because they’re looking to expand production, acquire another company or extend their brand through licensing or other businesses can benefit from developing an accounts receivables-based factoring relationship.
“In a growth mode, the factoring model self-adjusts to the growth of a company. It’s much more interactive than traditional banking or even asset-based lending,” said Michael Stanley, executive vice president of Rosenthal & Rosenthal Inc.
In an accounts receivables-based relationship, a factoring firm advances money to a manufacturer against the firm’s accounts receivables. The apparel company gets funding up front to support its overhead capital, produce more goods and meet orders, and it gets the credit insurance and collection expertise of the factoring company.
This type of borrowing helps small firms grow; many of today’s biggest vendors got their start by borrowing against their receivables. When Sidney Kimmel and Gerard Rubin spun off the Jones New York, John Meyer of Norwich and Emily Just Emily units of W.R. Grace to become the Jones Apparel Group, they leveraged their receivables through a relationship with Walter Heller at Heller Financial Commercial Services, said Stanley Officina, president of Ultimate Financial Solutions LLC.
At the time, the deal was announced, late in 1975, WWD reported that the combined volume of the three brands was $55 million. Jones is now a $5 billion company that operates on such a scale that outside factoring relationships are not practical. The initial factoring relationship likely helped Kimmel and Rubin retain control of the company instead of seeking outside financing partners, Officina explained.
Liz Claiborne Inc. is another example of a company that leveraged its accounts receivables to grow its business. During the company’s big growth years in the Eighties and Nineties, Liz Claiborne dealt with Congress Factors to manage credit exposures and receivables before ultimately taking the process in-house.
A vendor’s accounts receivables are one of the first assets it can leverage when it’s strapped for money to fund operations. “A factor will advance money against receivables up front so the company can finance its working capital and finance its business operations, thereby growing sales. That’s how a factor can help a company that is growing or looking to grow,” said Jon Lucas, senior vice president and Northeast regional manager of CIT Commercial Services.
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As a vendor ships more goods, producing more accounts receivables, it has access to more funding. The factor’s exposure increases in step with the growth of the company, Stanley added, provided all things with the company remain equal.
“It’s a perfectly natural way of using your own company’s assets to grow,” said Gary Wassner, president and principal of Hilldun Factors.
In the fashion industry, where there are a number of costs to be met each week, from payroll to sample makers, companies are dependent on cash flow, Wassner said. The payment cycle of retailers, ranging from 30 to 90 days in extreme cases, doesn’t always meet those needs in time.
For a growing company, the guarantee of payment on accounts receivables up front can enable it to take on large orders that it might have been reluctant to accept otherwise, Officina said. Credit protection on receivables and the outsourcing of the firm’s collections to the factor are the biggest benefits for a vendor, he said.
Receivables may be one of the logical first assets a company has to leverage, but they don’t have to be the only one. Companies look first to receivables financing, said John LaLota, president of Sterling Factors, but if growth outpaces what the receivables can support, it becomes necessary to look to other assets.
“Accounts receivables is the first line of borrowing. After you’ve depleted your ability to borrow against receivables, the next place you look to is inventory. After inventory, you look to other assets, equipment or personal assets, for example,” LaLota said.
Many vendors that start their relationships with a factor by outsourcing their accounts receivables seek other kinds of financing as the business grows and becomes more complicated. But they all have to start somewhere, sources said. Outsourcing the accounts receivables gives vendors the room to focus on their core competency: designing and producing apparel.