What Does an Economic Shift Mean for the Factoring Industry?

The global economy started out this year with a whimper, not a bang.

The U.S. stock markets have been on a roller coaster ride. In January, the Dow Jones Industrial Average lost 5.5 percent of its value, and the NASDAQ sank 8 percent that same month. Oil prices have plummeted to their lowest level in 12 years. On top of that, a strong U.S. dollar means that American-made goods are more costly for overseas customers. Consequently, international clothing companies, such as Nike and VF Corp., will see their foreign-generated revenues take a haircut and stymie apparel companies hoping to expand to new overseas markets. The question is how will this affect apparel companies and the factoring business? California Apparel News recently spoke with some finance-industry executives, who give their perspective on what is ahead for factors and their clients.

Mark Bienstock, Managing Director, Express Trade Capital Inc.

The factoring industry should prosper during these turbulent economic times. In good times, everyone does well. During bad economic times, factoring and asset-based lenders do exceedingly well.

This is a result of many financial institutions beginning to “pull back” from actively lending to clients. Also, many financial institutions get very concerned over the losses incurred by their clients. We lend against the collateral of our clients—namely, accounts receivables.

Our “door-to-door” financing model provides us with significant security in financing. By offering factoring, purchase-order financing, letters of credit and logistics all under one roof, we are involved in all aspects of the transaction.

Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal

Uncertain economic times are difficult for most, if not all, businesses, including the factoring business. It will be a challenging year for the apparel industry as consumers may be reluctant to spend money in a rocky economic climate.

Thus, we may see fewer start-ups crop up, and existing clients’ volume will generally be flat or down. On the flip side, in challenging times for the retail community, there will be opportunities for us to gain clients from those companies that want to credit protect and factor their receivables, especially after they take a credit loss or two.

At Rosenthal, our credit parameters will remain the same—making decisions as we always have by focusing on the collateral performance and, more importantly, the people behind the business.


Gino Clark, Senior Vice President, Portfolio Manager, Western Region Capital Business Credit

Gino Clark, Senior Vice President, Capital Business Credit

International trade touches nearly every single product sold in the United States. The uncertain global economic climate has strained historical supply-chain relationships between U.S. buyers, typically served by the factoring and banking industry and their international suppliers.

In the past, many international suppliers extended open terms to U.S.-based buyers. However, as credit markets tighten internationally, we have noticed a trend whereby international suppliers are now looking for quicker payments from their U.S.-based buyers.

This trend puts continued pressure on the U.S. buyer to help support the cash needs of the international suppliers. It is apparent in the recent increased usage of asset-based factoring facilities and bank facilities to support earlier payments to suppliers.

CBC expects continued volatility in the global markets despite forecasts of modest growth in the domestic market this year. As such, CBC expects an increased need for both our factoring and supplier early-payment products to help smooth out these trends and accommodate the ever-changing supply-chain needs.

Mitch Cohen, Western Regional Manager, CIT Commercial Services

I do not see us going into a recession, but the uncertain global economic climate combined with the strong U.S. dollar does create a headwind in our export markets.

In addition, I would expect our importers to use this opportunity to negotiate favorable pricing from their vendors.

Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.

Factors are in the business of approving customers credit and lending money against accounts receivable. The vast majority of their revenues are derived from earning a percentage on their customers—whether to wholesalers or retailers—and from lending money against the credit-approved accounts receivable.

The uncertain global economic conditions that we have seen and felt over the last several months could cause some shifts in how factors credit approve their customers’ invoices.

For example, if the economic uncertainties cause a slowdown at retail, this could put financial pressure on retail sales. Falling sales means falling profits. Falling profits could create a situation where the retailers’ credit is now severely limited or completely cut off. We have experienced this over and over again. These economic issues could impact how the factors determine the credit worthiness of the buyers and therefore have a detrimental impact on their customers’ ability to sell merchandise.

When economic conditions are unstable, lenders tend to want to minimize risk, and they can become more conservative. On the lending side of the factoring business, it could happen that over advances, inventory loans and other riskier areas of lending might become more difficult to obtain. If you are in this position, you might be forced to clean up the over advance or pay down some of the loan.

Overall, I think it is true that when economic conditions are unstable and unpredictable, all types of lenders get more conservative and want to minimize their risk.

Apparel manufacturers and importers need to continually review their customer lists to be certain there is no large economic risk with any of their customers. They also need to project better their cash-flow positions and inventory needs to be less reliant on overdrafts and inventory loans.

Sunnie Kim, President and Chief Executive Officer, Hana Financial

We expect the uncertainty in the global economy to provide emerging new opportunities for the factoring industry.

When there is unevenness in the economy, banks typically tend to tighten their fiscal policies. Therefore, there becomes a significant amount of businesses that are either displaced by or unable to obtain the support of lenders, which enables the factoring industry to gain access in providing working capital financing and credit-risk protection.

These companies—some which may never have considered factors in the past—can now benefit from the services factors can provide. The factors benefit from gaining new clients and theoretically moving into new industries.

Additionally, if the global economy is challenged, the possibility of additional interest-rate hikes may not come to fruition domestically. This, combined with low oil prices, would mean that consumers would continue to have discretionary income, which could translate into more spending at the retail level.

However, uncertainty with other global economic powers, such as China, could still cast a dark cloud. But, a lower-rate environment might mean more investment into small and medium-sized businesses, which could spur additional job growth.


Louis Mastrianni, Managing Director and Head of Apparel Commercial Banking, JPMorgan Chase & Co.

Louis Mastrianni, Managing Director and Head of Apparel Commercial Banking, Chase

The global economic climate may have less impact on the apparel industry this year than one might expect.

With the wind at the back of the consumer sector, as the job market continues to slowly recover, with pay gains rising and dropping oil prices freeing up more disposable income, spending power will likely increase.

Digital adoption is also influencing consumer spending globally, not only shifting expectations for local retail shops but now consumers are constantly connected and able to buy goods anytime, anywhere.

Robert Meyers, Chief Commercial Officer, Republic Business Credit

The level of global economic uncertainty will negatively impact trade in 2016 as the financial system reacts to recent pressures on the major stock indexes.

Currency fluctuations will be the toughest challenge for apparel suppliers in 2016. The strengthening U.S. dollar increases the buying power of domestic importers while decreasing the demand for U.S. exports. Global economic uncertainty will be affected by negative Japanese interest rates, slowing growth in China, devaluation of the peso and worldwide pressure on crude oil prices. Economists are signaling reduced confidence in the U.S. Federal Reserve commitment to raise interest rates.

Apparel companies will continue to have access to factoring and other bank lending options. Apparel companies can borrow on their receivables, inventory and obtain letters of credit to import product without significant impact of the economic uncertainty.

Domestic apparel companies will have access to affordable capital, but their suppliers may not be as lucky. It will likely be more expensive for apparel suppliers to borrow given the economic activity in their markets. Prolonged exposure by suppliers to uncertainty could result in reduced trade payment terms, increased deposits required and increased raw-material costs for future ordering seasons. U.S. apparel companies will see their supply change revise and review payment terms that likely will yield increased domestic borrowing from their lenders.

It is important for apparel companies to engage their accountants, advisers, lenders and equity providers during 2016 as their suppliers face increased pressure.

Don Nunnari, Executive Vice President/Regional Manager, Merchant Factors Corp.

At Merchant, we are highly specialized and concentrated in the apparel, shoe and textile industries.

Many of our clients are startups and small clients. We hope that consumers will spend more of their gas-tank savings on apparel and shoes.

For our clients exporting, it is more challenging in some markets because of the strength of the U.S. dollar. Our factoring business is not impacted because our clients factoring export sales are not that large.

For our clients importing fabric or garments from China, there is more pressure to send cash for purchases and a reluctance to accept letters of credit. This increases the risk factor and must be closely monitored.

On the new-business front, we are seeing more prospective new clients looking to expand to the U.S. market. Many of these prospects are looking for old-line factoring for the purpose of the factor guarantee and collection of accounts receivables.

Ken Wengrod, President, FTC Commercial Corp.

There will always be uncertainties with the global economy in one way or another. Yes, a drop in oil prices, China reporting slower growth and countries devaluing their currency all present new challenges for our economy.

But the uncertainty of the global market will have little effect on the factoring business this year. We should not forget that the U.S. economy is the bright spot among the world’s advanced economies. Our economy is stronger than ever, with its low unemployment rate and steady new business growth. And it’s in better shape than that of any other big, wealthy country.

I believe all economic dilemmas are actually opportunities for growth. The key lies in not being side-swiped by the macro level of economic wavering that will always be there but staying focused on the micro level of things that can be changed.

The greatest catalyst to promote this growth is a factor’s ability to lend and support prosperity. There are four significant changes within our industry right now that should be focused on.

1) The U.S. consumer is spending more money on non-apparel items. U.S. consumers have been spending their money on travel, smartphones, TVs, computers and the like instead of clothing. Apparel manufacturers need to rethink their concepts and create fresh, new designs to draw consumers back to their merchandise. The season for replacing wardrobes is nearing, so timing is perfect with the coinciding spending declines on future iPhone sales where the market has reached a saturation level. Those potential sales can be diverted to apparel purchases.

2) There are internationally expanding U.S. apparel markets. Europe and Asia are searching for U.S.-designed and -made goods—especially for the California lifestyle aesthetic. More than 70 percent of the world’s purchasing power and nearly 95 percent of its consumers are located outside of the U.S.

As factors, we need to become better conduits to the opportunities knocking at our California doors and encourage these merchandisers to finance transactions abroad as seamlessly as we do for domestic retailers. The emerging economies—such as Kazakhstan, Azerbaijan and other oil/gas dependent countries such as Saudi Arabia, Kuwait, United Arab Emirates and Nigeria—all have delicate circumstances that factors are best to cautiously handle.

3) Chinese manufacturing has been slowing, which is causing factories to go out of business due to overcapacity. This puts American importers at risk. Buyers need to make sure they truly understand the financial viability of the suppliers and be vigilant of suppliers requesting cash deposits against open-credit shipments. There has been an increase in suppliers taking cash deposits and then being unable to ship the goods due to their financial plight. As factors, we need to caution our clients to properly vet their suppliers and avoid such financial setbacks.

4) Millennials are changing their buying habits. As of 2013, millennials born between 1980 and the mid-2000s represented one-third of our population. They are significantly straddled by low-paying jobs, expensive medical insurance, student loans. They are saving a portion of their income to meet these expenditures.

They are very discriminate about what apparel they purchase. They are not just focusing on price, they’re demanding fashion/style with great value, quality that adds longevity to their wardrobe as well as demanding apparel makers to be socially responsible.