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Globalization Makes Textiles Factoring A Better Match

<i>International trade, specialization change faces of both industries over past two decades.</i><b>By Cosby Woodruff, Assistant Editor</b>

ManagementBy Cosby Woodruff, Assistant Editor Globalization Makes Textiles, Factoring A Better MatchInternational trade, specialization change faces of both industries over past two decades 

Factoring, like textiles, has undergone some heavy changes in recent years. Many of the changes in the two industries mirror each other. Both have seen the number of businesses in the industry reduced by mergers. And both are seeing a trend toward specialization. Finally, globalization is a major component of each industry.While basic factoring services remain largely unchanged, those delivering the services and the way the services are delivered have changed.Tyco Capital (until recently CIT) is one of the main providers of factoring services to textile organizations. Terry Oelschlaeger, Tycos Southeast regional manager, says factoring products now are available in more customized packages than the earlier one-size-fits-all approach.Oelschlaeger broke those services down into a few main areas: bookkeeping, collections, credit underwriting and credit against accounts receivable. Atlanta-based SunTrust offers the same services through its SunTrust Receivables Capital Management Div., says Larry LaCroix, senior vice president. BookkeepingContracting a factor to handle bookkeeping often boils down to lowering overhead and reducing operating costs, especially for a smaller firm. Oelschlaeger says textile firms are best at producing textiles, and many of them need help with financial management. This is where the bookkeeping service comes in handy. LaCroix says many of SunTrusts larger customers want bookkeeping services for their accounts receivables and outsource that to the factor. CollectionsThis is one of the more obvious reasons to use a factor. By selling the factor the accounts receivable, a textile firm gets its money and the factor takes the risk of collecting on the debt. But passing on the risk is not the only reason to use a factor for collections. Some textile firms find it easier to outsource this task, just as they do with the bookkeeping operations. Credit UnderwritingWith the factor assuming the risk of accounts receivable, the factor also wants to assure itself the risk is sound. Often, in todays textile market, a textile producers clients may be offshore operations, making it difficult to ascertain the creditworthiness of the client. A factor may be better equipped to handle this procedure. Financing When a textile company sells a receivable contract to a factor, the factor generally is expected to pay when the account comes due. If the textile producer needs a quicker turnaround on the money, it can receive an advance from the factor. This also has certain accounting advantages over a typical commercial loan.In the past, a textile company wishing to engage a factor would have faced a contract requiring it to accept all those services. Now, the textile firm can select which services it will require.SunTrust set up a Receivables Solution Group, LaCroix says, to "customize products based on need." This may include customizing a packaging of traditional services, or even creating new services the customer may desire. Most of these new services relate to import/export credit, he says.A textile firm has several reasons to pick each of the services. But Oelschlaeger says most textile firms still select a full-service package when contracting for factoring services.The factoring provider makes its money with two kinds of fees: a commission fee for the factoring and interest on any cash advance against accounts receivable.Oelschlaeger wouldnt reveal Tycos range of commission fees, but he did say it bases on several variables. Factored sales volume, average invoice size, number and type of customers and relative credit risks each impact the fee a factors client may expect to pay.Similar variables determine what interest rate a client will pay on a cash advance. "All of it is tied to the competitive market," Oelschlaeger says. The interest rate "is a function of the prime rate. It can be above, at or below prime."Again, the size of the loan and the creditworthiness of the borrower determine this. Services similar to factoring are available from other sources, but there are significant differences.
Most commercial lenders will accept accounts receivable as collateral on a loan, but in that case the borrower maintains the risk if the account goes bad. In a factoring arrangement, the factor purchases the account and any risk that comes with it. When the factors client borrows against that account, the client enjoys more protection. Another benefit, LaCroix says, comes in accounting. When using cash advance credit from a factor, a company is able to show less book debt to the public. This especially benefits publicly traded companies worried about the effects of debt on stock prices. "There is an off-balance-sheet component to it," he says. "It is selling an asset, not showing a debt."Of course, if the textile firm collects the account itself, it gets 100% if its customer pays. Once the account is sold, the textile firm settles for something less.Some insurance companies sell credit insurance policies, with annual premiums, deductibles and other features of insurance. Where a factor ensures the entire balance due a textile firm will be paid, an insurance policy generally pays a set percentage after the deductible is met. And the policy may have a damage cap.Once again, however, the factors commission reduces the amount due a textile firm in a factoring contract. Factoring may at first glance appear to be tailored to the smaller company that cant afford a full accounting department or that doesnt have the cash flow to weather a few late-paying customers. Oelschlaeger says, however, that isnt the case.Tycos clients, he says, "range from businesses doing a few million dollars to several hundred million dollars. It is small manufacturers and large." SunTrust reports a similar range of businesses in its factoring client list.Large companies often contract factors, Oelschlaeger says, not because it is vital to staying in business, but because they can outsource credit, bookkeeping and collections more economically than performing those functions in-house.Figuring the percentage of textile firms that use factors would be strictly guesswork, Oelschlaeger says. But his guess would be a sizeable number. "Not all factors release sales data," he says. And those that do, dont release it by industry.
Terry Oelschlaeger, Tyco Capital Southeast region manager, says globalization and specialization are trends facing textile factoring."It is an impressive number. It is certainly significant within the industry." LaCroix echoed those thoughts. He says about 75% of SunTrusts factoring is for textile or apparel companies. LaCroix says yarn companies are most likely to use factoring, with weavers and knitters somewhat less likely. In some cases at least, yarn companies may turn to a factor because their customers are other textile firms, who may present riskier credit.With increase globalization in todays textile market, there are more concerns for factors. This can make work more difficult for a factor, but it certainly hasnt caused factors to scale back activity. To the contrary, it has in a sense increased demands."We are expanding and following textile market better," LaCroix says. "We have be to ahead of the game and international is the fastest growing area." He says SunTrusts factoring for international trade grew by 65% last year and 70% this year.Knowledge of the business environment of the host country and the textile customer are what the factor contributes. For example, if a U.S. knitting operation is selling to a Latin American cut-and-sew operation, the knitting company executives may not be able to determine creditworthiness of the apparel manufacturer."The customer is not in a position to get as much credit information," Oelschlaeger says. "We bring credit knowledge to the table."LaCroixs bank holds similar knowledge in its factoring offices. "You cannot look at purely domestic," he says of todays textile market. "We can do all exporting to 160 countries." A big part of that is decided what credit risks those offshore customers may have and tailoring packages to fit those risks.Oelschlaeger says the constant state of change among customers of textile products can make that credit information a moving target. "A plant in Mexico today may be in Honduras in six months and in Panama in a year," he says. "It increases the need for a third party who makes its business that way."Globalization creates other issues for a factor. Many cut-and-sew operations are in less-developed countries, meaning political or financial stability can increase credit risks. On the other hand, many of these companies are subsidiaries of U.S. firms, reducing the risk.And it isnt just exporting that uses factoring. SunTrust offers an import guarantee program that replaces a traditional, costly letter of credit on imports. Each of those reasons contributes to factoring's continued growth among textile companies. "We are seeing a lot of textile companies," LaCroix says of SunTrusts factoring growth. "They are looking for ways to protect themselves from uncertainty in the markets." That is spelling good times for factors, despite some market uncertainties. "We are having a very good year," LaCroix says. "Despite some challenges in the textile industry." Five Steps To Factoring ContractA factoring relationship has five basic steps, according to Tyco Capital.In the first step, a textile company enters a factoring relationship, and the factor customizes an order-submission procedure for on-line credit approvals via the clients computer. The factor also establishes pre-approved credit lines for the textile companys customers.The second step finds the textile company shipping an approved order to its customers along with a bill, indicating payment is due to the factor.When the invoice matures, at the third step, the factor collects from the textile companys customer and credits the textile firms account. The factor manages the receivable, including any lock box, cash application and collection of past-due accounts. The factor also reports any deductions or disputes to the textile firm. If a textile firms customer defaults on payment, in the fourth step, and the factor deems the customer financially unable to meet its bills, the factor pays the client for the amount of the approved invoice.The fifth step is an as-needed line of cash advances against the account receivable. This allows the textile firm to be paid on shipment, while allowing it to extend credit to its customers.November 2001