Financing Options for a Quota-Free World

As a growing number of apparel manufacturers move production overseas, factors are receiving more requests for letters of credit and purchase order financing from domestic companies. But the factors are also noticing that foreign vendors are relaxing standards for issuing open credit in order to attract more American businesses in an increasingly competitive landscape.

“They go hand in hand,” said Jeffrey Enoch, vice president at New York’s Rosenthal & Rosenthal Inc., referring to parallel increases in imports and factoring services including letters of credit.

Enoch, who is based in the company’s California office in Woodland Hills, said requests for letters of credit and purchase order financing began increasing two years ago. Retailers’ demands for lower prices have forced many manufacturers to look overseas, he said. But the trend has gathered speed in the months ahead of the Jan. 1 expiration of the World Trade Organization’s apparel and textile quotas. Enoch said that, as a result, Rosenthal’s business with importers has doubled. “I think the trend is going to accelerate big time in 2005 because of the lifting of quotas,” he said.

Donald Nunnari said he, too, expects a surge in letters of credit in 2005. Nunnari is senior vice president and regional manager in the Los Angeles office of Merchant Factors Corp., a New York–based refactor focusing on the garment industry. So far, Merchant’s letter of credit business is up nearly 70 percent over the prior year, he said.

Used extensively in international trade and more rarely, domestically, a letter of credit is a promise from a factor to serve as guarantor if the manufacturer doesn’t pay on time. Purchase order financing is a form of financing whereby a company receives money from a factor to fund production for an order.

While the letter of credit is the traditional method to fund overseas production, purchase order financing is becoming more common, said Bruce S. Berton, officer and director of international business consulting at accounting and consulting firm Stonefield Josephson Inc. in Santa Monica, Calif. He said purchase order financing is used for annual volume of $5 million and up. “The letter of credit business is picking up mainly in the smaller firms,” he said. “The bigger boys are going with purchase order financing.”

Not all small firms obtain credit. Stanley Suh, account executive at Los Angeles’ Finance One Inc., said letter of credit requests have more than doubled since last year. He said many manufacturers want to go overseas because others are and that most of the requests are filed for operations in China. But Finance One rejects as many as 40 percent of them, he said. His main concern with Chinese manufacturing is quality control. “In China, it is a quantity business rather than a quality business,” he said. He said he rejects letter of credit requests if the company has no collateral, asks for too much money or is too risky as a new, unestablished player.

American companies can bypass a letter of credit and receive open credit, which grants them more standard selling terms. Mitch Cohen, senior vice president and regional manager of CIT Group’s CIT Commercial Ser vices in Los Angeles, said that, over the past two years, more importers are getting open credit.

“Because of the overcapacity in Asia, there is more of a need for foreign manufacturers to do business in the United States,” Cohen said. Hence, foreign vendors offer more open credit.

Rather than waiting two to three years, American companies are also receiving some open credit from foreign suppliers immediately, according to David Reza, senior vice president for the Western region at Milberg Factors Inc. in Glendale, Calif. “For the supplier, [open credit] might be a selling tool to the customer in the United States,” he said. Nonetheless, Reza cautions American companies against abusing the relationship. “The open credit is really a privilege,” he said.