The Factor Guru

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Archive for category Economy

Warning Will Robinson: Proceed with Caution

Mar 6

Posted by Gen Merritt in Economy | Comments off

In 2008, the National average diesel fuel price peaked at over $4.70 in July. At that time, these rising diesel fuel prices occurred during a continued weakness in freight volume, which resulted in 2008 being one of the worst years in the transportation industry with minimal relief seen in 2009. In fact, over 3,000 trucking companies went out of business. Today, estimates project rising diesel fuel costs to be close to $4.00 by mid-2011 with a possible cumulative impact that extends into 2012 with prices again close to $5.00.

Yes, there was a lot more going on in 2008 than just these rising fuel prices… kind of reminds me of now, except today we have a weakened economy slowly showing signs of improvement and gradually increasing consumer confidence. Of course, this does not give a lot of lead way for the possibility of the housing market to fall into another downward spiral, for unemployment numbers to remain at similar levels where they are now over the course of 2011, for the oil supply to continue being focused on importing while drilling remains on a permatorium (is that an official word), and the list goes on… we haven’t even talked about the Middle East (at least not directly)…

But, let’s look again at those escalating fuel costs projected for this year and the next. Learning from some of the lessons in 2008, many trucking companies were slow to react with fuel surcharges. Although many anticipate a faster reaction to these rising costs for this time around, transportation business owners do not believe that these surcharges alone can help recover these diesel fuel costs and resulting losses. This comes at a time when trucking companies are looking to replace equipment as they have spent the last few years getting through with what they have. Now, it’s time to update their fleets and meet new regulation requirements. Financing for these fleets may continue to be a challenge though.

Another potential for concern as prices continue to rise is the impact to shippers which affect several industries. Could fuel usage patterns force shippers to consider such options as bringing manufacturing sources closer to their facilities? Could consumers start pulling back on other spending and becoming more frugal once again? What impact will all of this have on the economy for small to mid-sized businesses, lenders and the factoring community?

There was only minimal growth through 2008; the factoring industry grew only 0.5% from 2007. The question for now: what does all this mean for the rest of 2011? What kind of growth can be expected for this year and the next? One can only look to make assumptions, which may not necessarily end up in a good place. Assumptions usually do not…

What do I get out of all the projections for the rest of this year? “Warning, Will Robinson…” Proceed with caution. Continue staying focused on your portfolios, especially on debtor credit, concentrations and debtor payment patterns. Be sure to look at background reports on owners and research other companies for alter egos or related companies. Be diligent in watching for early warning signs and identifying red flags to prevent fraud or mitigate potential losses. And, just in case, it never hurts to be lean (not necessarily mean). Continue looking for ways to become more efficient and keeping costs down in your operations.

Wishing you success. The Factor Guru.

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A Call to Action: Regulatory Awareness

Jan 23

Posted by Gen Merritt in Economy | Comments off

no moneyWith the events surrounding CIT, many businesses and publications have noted an increased awareness on the importance of factoring. This was considered a good thing: educating the public on the value that factoring brings for small businesses across the U.S.  After all, CIT’s rise and later fall was not attributed to their factoring division.

And yet, CIT’s other business segments combined with other nonbank, unregulated, newsworthy companies that failed in 2008 and 2009 have shed new light on something referred to as “Shadow Banking,” which many believe is to blame for the recent economic crisis.  What began by general comments during a speech in 2008 has evolved into a full out mission.

Unfortunately, this new light may ultimately and indirectly impact the factoring and asset based lending (ABL) communities at large, which would also adversely affect small businesses.

How so? As early as February 2010, rumblings in the marketplace have noted that staffers may begin preparing new legislation in the regulatory reform bill, which is intended to regulate the Shadow Banking segment. Some believe, including the American Factoring Association, an advocacy arm of the IFA, that both factoring and ABL companies could be inadvertently bundled under the category of Shadow Banking.

Note, however, that the majority of these factoring/ABL companies are nonbank, unregulated financial institutions that provide ongoing working capital to small businesses. These are predominantly independent financial institutions. Their sole purpose is to provide capital to companies that simply do not qualify for traditional bank lending; they do not engage in the trading of derivatives or collateralized debt obligations. They do devote their energies towards accurately valuing the most liquid assets of a business such as receivables and inventory.  Funding is not provided based upon past financial performance, time in business, or even future earnings or performance of a business. This alternative form of finance is very different, while often misunderstood.

In the January 8, 2010 publication for The Deal, one article noted final legislation should be made public near “the end of 2010 for 2012 implementation. This means uncertainty will prevail for the bulk, if not all, of next year.” This article focused on mortgage securitization and other forms of finance, however, and not specifically Shadow Banking. With that said, many of the items addressed may also be included in the next legislative bill.

What are possible inclusions for this new bill? For one, possible tightened capital requirements for banks that finance factors and/or ABLs, thereby potentially limiting financing resources, or raising the cost of financing for factors and ABLs. In the article mentioned in The Deal, one possibility would be not just to tighten capital requirements but to assess standards for “fixed capital requirements for various types of risk-weighted assets.” Knowing that many of the companies using factoring and ABL services are not considered bankable, what would their risk weighting be considered?

Moreover, the ramifications of this heightened awareness and legislation has the potential to greatly impact small businesses by then shutting off working capital to these companies that is now so readily available through such forms of alternative finance. The result for many small business owners: fewer available financing options… and that is just the beginning…

There are some finance companies who believe this type of legislation may never occur, or that this regulation would have little impact on their business. There appear to be more who believe that this regulation needs to be addressed now, as the effects of such regulatory reform and legislation would dramatically impact their individual business, as well as the factoring/ABL industries and small businesses alike. As Adam Smith said, “…by pursuing [our] own interest [we] frequently promote[s] that of the society more effectually…”

The AFA has already identified a lobbying firm in Washington, D.C. to not only create a preemptive effort for the benefit of the factoring and ABL communities but to also increase awareness on how critical our segment of the commercial finance industry is for the U.S. economy as a whole. If you have questions on this potential legislation or to find out what you can do to help, contact the American Factoring Association at (805) 773.0021 or visit their website at www.AmericanFactoring.org.

Wishing us all continued success. The Factor Guru.

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Performing Industries during Recessions

Jan 13

Posted by Gen Merritt in Economy | No Comments

Looking back on prior years, certain industries have thrived during recessionary periods, predominately within healthcare and business services. After much review, many believe healthcare services and healthcare related businesses remain strong prospects for factors during these challenging times. Overall, I tend to agree with this; however, differences do exist and should be considered when comparing prior performance with the issues faced today. Primarily, these differences focus on the individuals now paying more for insurance and health benefits, thereby impacting the dollars within the healthcare marketplace. We are a consumer driver healthcare environment today.

And, just to clarify, healthcare does not necessarily mean insurance-based or Medicaid/Medicare receivables, which are considered ‘niche’ factoring products requiring specialized expertise. If you have questions on why these areas may be different than others, please feel free to email me. Examples of healthcare related business for a typical factoring client may include those companies who provide nurse staffing, linens or other hospital supplies, lab or sanitization equipment and/or services, technology or consulting/planning work and more.

And, let’s not forget that discount retailers are strategically poised to excel during a recession, provided you can structure and monitor around potential credits (i.e., damages, stocking fees, shelf space fees, advertising charges, and returns, among other potential offsets). They do exist; read the contracts or look at the client’s prior performance. The first quarter tends to be a high credit/adjustment period for the retail sector, even for these discounters.

Other growth industries to watch now compared with historical “recession proof” data may also include security services (both security guard and IT security); oil and gas and alternative energy products; passenger transportation; and storage and/or other warehousing services.

Remember though that the industry in which a company operates is just one aspect; who they sell to may be another. It is important to understand the nuances within an industry you are targeting, as well as the company and its customers.

Identifying and targeting key industries during challenging financial times may help create solid relationships with growing and performing companies, ultimately positively impacting your bottom line.

PS. Did anyone notice that today’s Yahoo home page had an article on 10 Hot Professions for 2009 and that it included factoring?

Happy hunting. The Factor Guru.

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What Happens Tomorrow?

Dec 7

Posted by Gen Merritt in Economy | No Comments

For those avid ABF Journal readers, look for an article soon on “The Perfect Storm,” that stemmed from a recent panel discussion hosted by the Finance Forum. Several analogies arose during this meeting that related to that movie and the current economic credit climate (or credit crunch). Those analogies were symbolic in a certain sense. They illustrated how we got here… where we are today.

During another meeting this week, one of the board members of the Finance Forum, Josh Steele of Euler Hermes, noted another movie, The Day After Tomorrow, which held other similarities. He described it by saying, “In the movie, the ice age is the Earth’s way of cleansing itself. In a way, this [crisis] is a way of getting rid of less stable companies.” The Perfect Storm was about how we got here; however, what happens after the storm? What happens tomorrow?

This credit tsunami, as Greenspan noted, evolved after years of overextending credit. This occurrence also fits within the factoring space with the number of factoring companies aggressively competing in a marketplace where working capital was abundant, where mitigating concerns and overextending credit was not the exception, but a way of doing business. Now, take a look around. The landscape has changed, and tomorrow is a long ways away.

If you recall, after the storm first hit, New York residents and visitors were running, seeking shelter. Respectively, factors have been looking harder at credit and how to better structure deals, yes. Some factors believe that this is all that needs to be done, just a little more structure, just a little more due diligence. All is fine, right?

The factoring world is entering a new era that will probably continue over the next few years. Its presence will unfold even more through 2009. How factors react to this credit crunch may be telling in how and, more importantly, who will come out of this storm intact. Will we all learn from each other’s mistakes?

In The Day After Tomorrow, some people [factors] decided to go outside, venture back out into the streets where they believed everything was safe once again… it was back to normal… or so they thought. But, this was only the beginning. It was then that the landscape changed, even more. The freeze hit. Do not construe this as a credit freeze. Even though it is a credit freeze for many traditional lenders, it is not for many factors… necessarily.

What it is, however, is more due diligence than originally contemplated, more monitoring on existing clients and for client customers (debtors) than was initially planned, and more focus on staying the course through this storm. It’s a time to review and assess our new environment and the players within it. Not all of them have survived; not all of them will survive. The landscape has definitely changed, and it is not over yet.

So, again, as Jason Evans [Dash Mihok] asked in the movie, “What’s going to happen to us?” Jack Hall [Dennis Quaid] replied, “What do you mean?” Jason expanded, “I mean us? Civilization? Everyone?” Well, what do you think the answer was… Jack summed it up with, “Mankind survived the last ice age. We’re certainly capable of surviving this one. The only question is will we be able to learn from our mistakes?”

Wishing you success. The Factor Guru.

 

 

 

 

 

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A Bumpy Ride: Plan Accordingly, Hold on Tight

Sep 29

Posted by Gen Merritt in Economy, General Information | No Comments

Okay… so only those of you who know this person will understand, “Are you kidding me?” Yes, that is what I said. The events of the past few weeks seem utterly surreal. Before you can process what just happened, another headline appears on your computer’s home screen. It’s all anyone talks about… the wild ride on Wall Street… and, it is downright scary when you think about it all. So, get ready…

Let’s recap on a few of these events since the Fannie Mae and Freddie Mac debacles roughly two months ago, although that wasn’t really the beginning was it? (More of an aftershock from deeper rooted decisions).

Bear Stearns, Lehman Brothers Holdings bankruptcy, Merrill Lynch, and the government takeover of American International Group, Inc. followed — we thought that was shocking at the time, now,

JP Morgan Chase bailed out the largest bank failure in U.S. history with Washington Mutual even after the $700 billion bailout was rejected by the House,

Wachovia Corporation was sold overnight to Citigroup Inc after a roughly $200 million win in their competitive bid against Wells Fargo,

Yesterday, the stock market fell over 400 points in less than five minutes; quotes from this day included “worst decline since 1987” and “the sum of all fears,”

There are now only four national banks (Citigroup Inc., Bank of America, JP Morgan Chase, and Wells Fargo… or would that be six with the other two changing their charters last week).

And, it’s not over yet…

The auto industry just received a $25 billion bailout of their own,

The government is still pumping in billions of dollars into the financial system and housing market, 

Congress has been in the midst of marathon sessions.

And, let’s not gloss over the other sideline headlines, further evidence that the buck didn’t stop there.

National City stock plunged yesterday and was downgraded begging questions relating to their future (…not going to go there but I will note their stock was trading less than Wachovia Corporation at the close of business). There are many others lingering in the sidelines; just a matter of time (or days as the events of the last few weeks have shown). Some experts anticipate up to another 1,000 bank failures over the next six months. Not all of these can be ‘rescued’ by the Fed. And, we haven’t even touched on the global market effects. 

Someone asked me yesterday, “What does all of this mean?” Honestly, how do you even keep track, or explain the fact that it would be like cutting everyone’s credit cards in half… all at once. And, that assumes they have jobs and will still have an income. Unemployment is expected to be over seven percent by 2009, the highest it’s been since the 1990-1991 recession.  The Secured Lender referenced an article that equated this ‘crisis’ to “depriving a body of oxygen.”

Of the banks left, there are some that are now implementing floors on pricing and even escalating pricing on already sent proposal letters for new commercial loan transactions, including for asset based lending deals. I guess this is better than the alternative… dare I say it… not making loans.

Even in this market, that may seem like a drastic measure, until you take a deeper look. One reason may be that LIBOR jumped to over three percent and may still rise; Prime may drop below this. Can you imagine? 

Stop — think about what I just said. Doesn’t that mean that some companies with low interest commercial loans would actually pay less than some banks or financial groups pay for their money? It is a Mad, Mad, Mad, Mad World (as Mark Sunshine’s First Capital blog noted).  

And, for factors, it will not be any easier. Yes, factoring companies may see a rise in business and in new fundings during this time period. But, what’s underneath? Take a careful look: What is in your existing portfolio… your existing client base? Can your portfolio handle the ride? 

Bailout, no bailout, we all have differing and apparently passionate opinions on this matter. However, we will all be affected. Who’s to blame, who should be held accountable, who comes out ahead, who suffers the most, who should correct it, and who should pay… the list of questions continues. At the end of the day, no one knows for sure. I just wanted to highlight what we should already know. It will be a long road until we get there. We will make mistakes. We will have to live with them. It will be slow. It will be painful. And, hopefully, the market will correct itself over time. Until then, stay the course, plan accordingly and hold on tight. Because, those headlines are right: We are all in for a bumpy ride.

 

 

 

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