How the Factoring Industry Has Adapted to a Changing Retail World
As the retail industry has changed into a split personality of online and offline shopping, so too has the factoring industry that finances manufacturers’ production and sales to clients.
Factors are getting more sophisticated with technology to ease the process of applying for money, checking on retailers’ creditworthiness and collecting funds.
Inventory financing, trade financing, term loans and acquisition financing have become more common.
While there are fewer bricks-and-mortar stores out there these days, there is still a healthy demand for clothing sold in various venues.
We asked a host of factoring-industry experts how their world has changed over the last few years.
Mark Bienstock, Managing Director, Express Trade Capital
The retail and apparel landscape has undergone a dramatic transformation over the last 12 months.
With the continued contraction of retailers and the change toward online purchasing, apparel manufacturers are left with fewer sales avenues.
Unless they have been proactive in working the e-commerce arena, they are destined to see a continued slide in their annual sales volume.
The apparel industry is no longer an attractive venue for families that looked to pass the keys down to the next generation.
From a financier perspective, we are willing to lend on inventory and provide purchase-order financing in addition to factoring where many of the lenders that did business in the apparel space have now exited it.
You must have a true passion and understanding of the apparel industry in order to deal with the ever-changing challenges that affect our industry.
Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal
The apparel factoring business has changed quite a bit over the past few years. Except for highly seasonal businesses (swimwear, outerwear, etc), it used to be very difficult to get an inventory loan that was not capped at the same amount of the receivable loan.
Due to the rise in e-commerce, which generates very little in receivables but requires higher inventory lending, it is becoming more common to have higher inventory loans than accounts-receivable loans. In fact, in our portfolio, we even have inventory-only loans for pure e-commerce clients, which we wouldn’t have considered just a few years ago.
This can make it more difficult to get financing for the apparel manufacturers if their incumbent lender hasn’t changed this requirement.
Gino Clark, Managing Director, Originations, White Oak Commercial Finance
The retail and apparel sector is always evolving. The current omni-channel retail environment provides a tremendous amount of data and information, providing real-time access to insights regarding consumer behavior, purchasing patterns and tastes. For the consumer, mobile shopping and exploration have facilitated access to more choices, better shopper comparison tools and on-demand shopping opportunities (e.g., Amazon Prime).
These market dynamics are also leading to more efficient markets and accelerated trend cycles. The most popular apparel item today may be out of style next month as a consumer moves rapidly onto the next “big thing.” Given these rapid developments, we believe no other industry is better at understanding and meeting the changes of its consumers.
These conditions are creating new opportunities for apparel manufacturers, importers and wholesalers who are exploring new revenue streams. This is an exciting time! Gone are the days when a company had simply five or six bricks-and-mortar customers.
Now, they may have five bricks-and-mortar customers, in addition to 15 e-commerce customers, and then also sell directly to the consumer through their own channels.
To address these changes it is important that factors and financiers are innovating alongside their clients. At White Oak Commercial Finance, we are providing more flexibility than ever before. For example, rather than just purchasing or lending on receivables, we are lending against different assets such as inventory.
In addition, we are lending at different points in the supply chain. Companies are approaching us in search of trade-finance solutions as well as traditional factoring. As long as a company has a strong management team, can demonstrate growth and isn’t afraid to explore new revenue streams, it will find a multitude of financing options.
Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.
The apparel-factoring business has changed concurrent with the changing business climate. That said, I don’t think it is necessarily harder or easier for apparel manufacturers to get financing. It all depends on your particular situation.
If you have a customer list that isn’t creditworthy, you will still not find a factor to finance you. There was a time when a large customer concentration was an issue that could affect both manufacturers and factors. With the decline of retailers, the factors have adjusted to allow for larger sales concentrations of creditworthy customers, allowing manufacturers to do more business with fewer retailers.
Inventory financing has become an important component of factor financing. There was a time when this was a rare occurrence, but now it is almost always part of the factoring formula. Inventory financing provides additional cash flow to the manufacturers.
With fewer factoring companies, due to significant consolidation in the factoring industry, there are fewer options for apparel manufacturers. But with fewer options, and fewer apparel companies seeking factoring, the surviving factoring companies have become more competitive with commission rates, interest rates and other fees. So pricing has come down in many instances, which makes it more affordable to factor financing.
Due to the lack of traditional factoring opportunities, many—if not most—factoring companies now offer asset-based lending (ABL). This differs from factoring as the lender does not guarantee its customers’ accounts receivable but merely lends against the open accounts receivables as well as providing inventory financing. This has created more opportunities for the lenders and, in turn, a different way to finance an apparel business at a lower cost.
Robert Meyers, Chief Commercial Officer, Republic Business Credit
Traditional apparel factoring remains mostly unchanged over the past few years. It is often difficult for companies entrenched within a specific market to evolve, as we have seen with companies such as Kodak, Blackberry and Toys R Us.
Typically, companies that respond to changes with flexibility and innovation are able to meet their evolving consumers’ needs. Apparel factoring companies consistently monitor monthly trends such as average days to pay, short payments and bankruptcy risk across the retail industry.
The most recognizable evolution that apparel companies should observe is the adoption of technology by their factoring companies. In most cases, the introduction of new technology improves the customer’s journey while aiding in quicker access to better-quality information.
One example of the many adoptions is the ability to sync or integrate your accounting system with the factoring company. Republic Business Credit recently developed a client-interface system to help its prospective clients complete the application process within a few minutes. The online process helps to greatly speed up the underwriting process, reduces paper and the necessity to print documents. It further enables the factor to receive current information across receivables agings, which list unpaid customer invoices, payable agings and month-end financials. RBC’s online model is similar to when individuals would use their Facebook or Google login to speed up the sign-in process to a new website. It is easier for apparel manufacturers to get financing than it has ever been. Over the past few years, many apparel factoring companies began offering asset-based lending products to customers. Competition in this sector is high, as there are more lenders, lower interest rates and increased funding offered on additional assets.
While it is easier for apparel companies to access funding, it remains true that not all funding is created equal. Some of the newer financing options will come at higher interest rates, lower advance rates and a more pessimistic view, which can reduce their willingness to take appropriate retail risk.
Dave Reza, Senior Vice President, Western Region, Milberg Factors
The factoring industry continues to reflect many of the underlying changes that occur in the retail and wholesale sectors. As in the retail sector, we have our share of ownership changes and consolidation. On a macro level, new ownership groups have entered the market, such as White Oak Commercial Finance acquiring Capital Business Credit. Others have become part of bank groups such as CIT buying OneWest Bank. Other changes that will affect the landscape are expected in the coming months.
On a transactional basis, factors are more regularly offering financing products that go beyond the traditional parameters of accounts-receivable services and advance factoring.
Inventory financing, trade finance, term loans and acquisition financing are commonplace now. Concentration risk, which has magnified as the retailer base has shrunk, is a fact of life now. Today, factors are more flexible in how they approach this risk.
As retailer technology requirements evolve, it’s not only apparel vendors that need to look forward. Factors have had to make significant investments in processing technology and online portals to remain technically compatible with both our clients and their customers.
It’s easier than ever for prospective factoring clients to obtain financing and/or factoring services. Technology has made communication faster and allows for both apparel companies and factors to find each other quickly regardless of geography.
Information once prepared can be communicated and evaluated much quicker, which results in faster decisions. No doubt the customer risk requires more in-depth analysis by the factor, especially with companies selling to major department stores. However, apparel companies are getting a much greater level of guidance vis-à-vis their customers.
The current retail environment presents every apparel company with unprecedented challenges covering every aspect of the business. Factoring today provides clients with better and faster information on customers and other risks. We take on greater and more concentrated risk, provide far greater levels of financial support and have invested heavily in reporting.
Lastly, the total out-of-pocket costs to the client have come down significantly.
Kevin Sullivan, Executive Vice President, Wells Fargo Capital Finance
The primary change that we’ve seen within the marketplace is a continued focus on consolidation within the apparel industry. Manufacturers and importers are seeking strategic partnerships, which leads to a greater need for acquisition financing.
We’ve helped a number of our clients acquire companies that have either great brands, solid niches within a given market or a customer base that complements that of the acquiring company. In many cases, the companies acquired are fundamentally good businesses that simply may not have the capital resources to grow and decide to partner up with another industry player.
While it’s true that some lenders have pulled away from the apparel industry due to the recent spate of retail bankruptcies, Wells Fargo has always viewed apparel as a very vibrant industry sector with great entrepreneurs who always manage to navigate through difficult times.
We see solid opportunity for companies with strong, management teams and the capital base and flexibility to deal with the changing retail landscape. The overall economy remains reasonably strong and many of our clients are actually showing nice growth in 2017, albeit with a customer base that is maybe somewhat different from previous years.
The bottom line is that for companies who have adjusted to the reality of the changing retail marketplace, there remains plenty of financing available.
Ken Wengrod, President, FTC Commercial Corp.
The most pertinent change in the recent retail and apparel landscape has been the evolution of technology and data mining.
Today, the consumer is able to see an apparel item online and expect to have it almost instantaneously.
The apparel world has just caught up to the cosmetics world, where the focus was solely on their ultimate customer for years.
Consumers are changing their purchasing habits from bricks-and-mortar stores to online purchases because of its vast selections and ease of buying. This phenomenon has caused manufacturers to distribute directly to their consumers instead of retailers, and the focus on consumers is now magnified.
This evolution detrimentally impacted those retailers who did not adapt along the way, which is evidenced by the recent closure of nearly 10,000 retail stores this year due to cutbacks and bankruptcies. It also negatively impacted those retailers who overexpanded for the last 10 years, employing their same dull platform.
These events have significantly impacted the financial condition of the retail-credit community, causing a deterioration in many factors’ collateral. The stronger the collateral base, the easier it is for factors to finance those sales. The overall credit decline of U.S. retailers has made it more difficult to finance these retail operations. The factors now have to create new avenues of financing for the manufacturers with this shift in distribution, such as creating ways to finance direct-to-consumer sales.
Also, it is time for manufacturers to expand their distribution worldwide and not rely so heavily on the changing U.S. retail landscape. There’s a huge untapped potential in expanding business by exporting to the 95 percent of global consumers who live outside of our borders.
In particular, European and Asian consumers are craving U.S.-made and -designed merchandise. Manufacturers should be sourcing new potential retailers as well as consumers in these foreign markets.