For one, what do factors typically rely most heavily upon when determining extending credit facilities to prospective clients? Their customers’ credit: the debtor credit. And, what is currently happening around us? Is there anything you read anymore without seeing businesses of all sizes filing for bankruptcy, restructuring or losing their financing lines? Probably not…

A recent article that came out on The Secured Lender’s email updates further expanded on this theme, focusing on certain industries.  Their take and others: we haven’t neared the bottom yet.

For a factoring company, continued vigilance on reviewing customer (debtor) credit must remain a priority. Further, special attention should be adhered in carefully looking at the underlying documentation supporting the sales made to these debtors (the receivables). If a debtor begins struggling with cash flow and a reason exists allowing for discounts, returns, credits or other offsets, then factors and their clients may begin experiencing more challenges in collecting on those receivables.  

Hence, the importance of sticking with the basics of factoring: continued focus on the debtor credit and underlying documentation supporting that sale.

Then two, it did happen; Prime went lower than LIBOR. But that’s not the big news. As Paula Cole sang, “Where have all the [lenders] gone?” After significant layoffs, even institutions such as Textron Financial Corporation ceased providing credit facilities to finance companies in late 2008. More and more banks and financial institutions are restructuring as well, causing a delayed effect on the small factor and their ability to finance their clients. And, what about the hedge funds who financed factors? Or, are we no longer allowed to talk about them… did they ever even exist?

With all these changes occurring, where is the factoring industry headed? Does anyone really know? Many factors with prudent monitoring procedures, a solid capital structure, and flexibility within their organization to contend with the new credit landscape will continue to grow, maybe even more during 2009 with the influx of new opportunities also resulting from the current credit market and conditions.  The question remains, however, have we really planned enough? Have you?

“A man who does not think and plan long ahead will find trouble right at his door.” ~ Confucius

Wishing you success through 2009. The Factor Guru.

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.