Factoring -- in which a supplier sells an invoice to a financer to be paid less than the invoice's value immediately -- all but dried up as a financing source for small apparel manufacturers in the wake of the recession. But it appears to be making a comeback, Just-Style reported.
Factoring's role in the apparel trade surfaced this month when department store chain Sears had yet another crisis after factoring companies reportedly scaled back financing to vendors who supplied the chain. The concern: The factor -- the company buying the invoice -- might be paid late or not at all.
"After reading about how much money a retailer has burned this year, a factor might say they are a terrible risk," said Paula Rosenblum, an analyst at RSR Research. "The value of factoring receivables is that the seller gets its money faster and the retailer has breathing time."
That risk made factoring unworkable for apparel manufacturers in the wake of the recession and its ensuing credit crunch. CIT, a leading factor that, at the time, provided an estimated 60 percent of factoring in the U.S. apparel and footwear industry, filed for Chapter 11 bankruptcy in November 2009. It emerged from bankruptcy quickly, but the fear that retailers simply might not be able to pay forced apparel suppliers to shift their concerns from getting paid early to getting paid at all.
But the simplicity of factoring gives it advantages over other financing approaches, such as retailer lines of credit backed by inventory and other assets. "Those have become risky because the way inventory gets valued is very complicated and the other covenants involved in those are very stringent," said Rosenblum. "If a company wants to close a percentage of its stores, the holder of the [line of credit] can say, if you do that you'll be out of covenant. So it's a very self-defeating concept for the loan holder."
Another challenge is a shift by retailers to more conservative inventory management. That means less risk for lenders but problems for manufacturers, said Marc Heller, a regional manager for CIT, because retailers are now willing to delay or cancel orders. "A lot of retail has changed to something called replenishment," Heller said. "That puts the burden on the vendor to hold product for when the retailer needs it. The vendors have become very astute in how they manage the retailers so that they don't have too much inventory."
RSR's Rosenblum said the rise in factoring is unlikely to be a long-term trend for apparel manufacturers, but added that the current resurgence of factoring means there is "more confidence the product will actually show up" and that the brand or retailer is relatively stable. "That just tells me that companies like CIT have decided it's worth their while," she said.