Small businesses 'factoring' cash needs

J. Michael Stanley, left, managing director of factoring J. Michael Stanley, left, managing director of factoring company Rosenthal & Rosenthal, with a client, Evan Cagner, president of BCNY International, at Cagner's office in Hicksville. (July 17, 2012) Photo Credit: Heather Walsh

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With bank lending tight, small businesses on Long Island are exploring factoring, a financing method that used to be considered a last resort.

Factoring is not a loan, although it does provide cash to companies that don't want to wait to receive payment from their customers. In factoring, a company sells its receivables, or invoices, to a specialized financing firm, called a factor, which collects the bills and deducts a fee. Companies say they use it to fund expansion and minimize risks such as deadbeat clients. Long Island's economy is dominated by small businesses. The 2010 census shows 93,350 businesses, or 98.4 percent of the total in Nassau and Suffolk counties, employed fewer than 100 workers each.

For small businesses anywhere, financing is always a more difficult proposition than it is for large businesses, and this issue has worsened since the recession, as banks have tightened lending standards after suffering steep losses on bad loans.

And so necessity and the Internet have familiarized more small- and medium-sized businesses with factoring as a way of getting money they need. The International Factoring Association's membership, now at about 400, has increased 10 percent each year for the past five years. There are about 600 factoring companies in the United States.

Some businessmen, such as Evan Cagner, president of designer shoe manufacturer BCNY International Inc. and marketing company Synclaire Brands Inc., both of Hicksville, say they view factoring firms as long-term strategic partners.

"They understand my business intimately," said Cagner, referring to the Manhattan factoring company Rosenthal & Rosenthal Inc. "Every time we've dealt with banks it has been a cold experience."

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Here's how factoring works: When a company delivers goods or services, it normally sends the customer an invoice, or bill. But if the company can't wait the 30 to 90 days it might take for the billed customer to pay, it goes to a factor. The factor buys the invoice, paying the company a majority of the invoice amount up front, usually within a day or two, and handles the collection process. Once the bill is paid, the factor deducts its fee -- which can range from 2 percent to 3 percent for a 30-day period -- and sends the remainder of the invoice amount to its client.

The main caveat: Factoring is almost always more costly than a traditional bank loan, small-business experts say. Comparing a factoring fee to a conventional loan's annualized rate is not straightforward because of varying terms negotiated and services that might be included in factoring.

"Our goal is to help our customers grow their business for an 18-month, two-year period, so they can become bankable," said Jim DiCamillo, executive vice president of Islandia-based factoring company RMP Capital Corp. Banks want to lend but are cautious because of new regulatory restrictions. "That bodes well for our industry," he said.

Many fashion vendors who supply retailers use factors regularly for efficient collection and protection against bad debt, said J. Michael Stanley, managing director of Rosenthal & Rosenthal.

"If I ship a dollar's worth of shoes, Rosenthal, on any given day, is not just collecting my dollar," Cagner said. "They are collecting money for 200 other customers."

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Manhattan factoring company DS-Concept Factoring Inc. quickly provides the money Global Connection of America Inc., of Whitestone, Queens, needs to continue its manufacturing and distribution operation, said owner Grace King.

"The lead time from getting the order and delivering goods might take four to six months, and we have to pay all that money up front," said King, whose company makes exclusive products, including specialty tools. "Our invoice is huge, and the line of credit was not enough."

Small-business experts advise businesses considering the use of a factor to do their research and be aware of all the terms and fees.

Operating a business is all about managing cash flow, contingency planning and having the resources to sustain a business for at least four to six months, said Lawrence Kushnick, a Melville attorney whose firm, Kushnick Pallaci Pllc, has many small-business clients. Before considering a factor, a company should do a cost-benefit analysis and ask if factoring costs will swallow all profits, he said.

"Always get three references of current customers," said Lawrence Gelburd, an entrepreneur and lecturer at the Wharton School of the University of Pennsylvania. "And make sure they have experience in the kind of factoring you want them to do."

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