Everything is negotiable when it comes to terms. The better the experience a factor continues to have with a customer, the better that customer's future rates will be. Some businesses still worry about bad publicity from using a factor. It's often the case that companies won't turn to factors until they've exhausted their line of credit at the bank.
But the reverse can also be true: Companies may also wish to get the easier money factors offer rather than face getting the cold shoulder at the bank. "A lot of small businessmen take it personally if they get turned down for a bank loan," says Leonard Leff, president of CDS Capital, a finance and factoring company in Lynbrook, N.Y. "They say, 'Do I want to get another rejection?' and they don't ask their bank for the loan."
The latest wave of services that factors offer is making them all but irresistible to many businesses. No files, no filing cabinets, no warehouse space for paper records.
Even today, many company owners who use factors don't much like to talk about it, except to assure the questioner that their relations with their banks are just terrific. Still, the latest wave of services that factors offer is making them all but irresistible to many businesses. Choung's factor, Leff of CDS Capital, is on the leading edge of firms offering these new services. On an average day, CDS processes about a million transactions and has about $375 million in outstanding credit.
Choung is a typical CDS client. He never actually sends or collects bills from his dry-cleaning customers: All billing and collecting is done by CDS, which keeps its clients' books showing cash position and cash received every day, bills paid, and accounts still receivable. The information is always available to Choung, in encrypted form, on CDS's website. Choung can download documents when he wants copies. Otherwise, there are no files, no filing cabinets, no warehouse space for paper records.
Lloyd Bernstein, whose Oyster Bay, N.Y., hardware store, called Bernstein's Home Center, has been in his family 82 years, originally used CDS only for its billing services; he only later moved on to the company's factor offerings. "At first glance," he says, "you think it must cost more, but the costs are probably about the same. We'd have 80 to 100 small checks a day, and the bank charges you to deposit those. There's no postage and mailing. I was able to cut my office staff by two people."
By using factoring, Leff argues, "the hardware store can compete against Home Depot and the local pharmacy can compete against Duane Reade. They can't do it themselves, because they simply don't have the cash. Every time you take on a new account, you need more money, and the banks don't understand the problem." As to the cost, Leff argues it can be worth it. "Of course, it's expensive," he says. "You've got $500,000 in bills and you pay us $15,000; that's a lot of money. But the question is, what do you use the rest of the money for? Most of our clients use it to expand their business."
Leff's business is a story in itself, one that very well may presage the future of the factoring business. He originally developed his services from experience as an outsourcer for billing. The 42-year-old is the son of a computer operator at Harvey Electronics, one of New York City's premier dealers in fancy audio-visual equipment. In 1972, to supplement his income, Leff's father, Arnold, offered to prepare and mail bills for pharmacies in the suburb where he lived. Harvey Electronics had recently installed an IBM mainframe to do its own billing and bookkeeping and had more capacity than was needed. Leff's father arranged to use the Harvey computers when the store didn't need them.
The business grew, operating partly at Harvey Electronics and partly in the Leff family garage, and the whole family chipped in. When Arnold Leff died, his 14-year-old son, Leonard, helped his mother keep the business going. "IBM gave us some free consulting services," Leff remembers with gratitude, "and our customers financed our expansion."
Leff went to a local college, but he kept working at the billing business. "You could see that losses were never an issue: People paid their bills." Since pharmacists are always tight for cash, Leff occasionally offered to collect as well as pay their bills, advancing them the money when the bills were sent and charging them a fee for the service. Leff's company became, in effect, an accidental factor.
Hardware stores were next, with chain operations like True Value eager to have a service that would give their members cash to maintain their inventory without burdening their suppliers. Because they could offer their customers credit, and keep their shelves well stocked, smaller stores themselves found it less difficult (it still isn't easy) to compete against Home Depot and other big box retailers. So far as the customers of these stores know, they have a charge account with the store itself, and a credit relationship is always a source of loyalty.
What actually happens when the customer charges a purchase at one of these stores? A clerk punches in the customer's identity and the details of the sale. The message goes to a printer in the store, which generates a record for the customer and the retailer. At the close of the day, an electronic message is sent to Leff's computers, along with all the other transactions of the day. Leff deducts his 2 to 3% discount, and usually enough to maintain the roughly 20% reserve, then transmits the rest to the store's bank account.
