Advice from Omar

Whatever the effect of the U.S. banking reforms under discussion last week (see above), they are unlikely to mute the small businessman's eternal lament: that a bank will lend him the money he needs only if he can show that he already has it. Nonetheless, in recent years the small businessman's plight has been significantly eased by a fast-rising breed of financiers who are called factors and operate on the theory that a company's best assets are its customers' debts.

Unlike banks and commercial finance companies, factors are not primarily lenders of money to their clients; instead, they bet that their customer's customers will pay their debts. The client company turns over all its accounts receivable (i.e., bills owed it) to the factor, who, having previously approved the credit of the client's customers, assumes full responsibility for collecting the bills and absorbing any bad debts. The factor either advances the businessman up to 90% of the amount he is owed at 7.2% interest, or pays him in full when the bills fall due. Thus, the client is spared the necessity of tying up funds in credit, can turn over his working capital More quickly and boost his sales. In effect, the small businessman who turns to a factor is heeding Omar Khayyam's advice: "Ah, take the cash, and let the credit go!"

Roman Origins. Though more than a score of financial houses act as factors, the field is dominated by three giants: Manhattan's Textile Banking Co., Boston's First National Bank, and Manhattan's James Talcott Inc., each of which turned over $450 million or more last year in factored accounts. Throughout the U.S., factoring today is so much in demand that the volume of sales handled in this way last year rose 15.5% over the 1960 level to $5.5 billion, may reach $6 billion this year.

Though its widespread popularity in the U.S. is a relatively recent phenomenon, factoring dates back to the beginnings of commerce. Prosperous Romans used factors (the term comes from the Latin facere, meaning to do) to handle the sales from their country estates. Factors followed the early settlers to the New World to handle business for British firms.

In the U.S., factoring was traditionally concentrated in the textile industry. In the past few years, however, the shortage of venture capital and fear of bad debts has prompted hundreds of companies in such diverse industries as toys, electronics, plastics and musical instruments to turn to factors with the result that 30% of all factoring is now done outside textiles.

Many businessmen are still reluctant to link up with a factor for fear of scaring off customers. Richard Reynolds, president of the Childhood Interests toy company, a Talcott client since 1957, said last week: "We had little idea of what factoring meant--beyond the notion that it was something to be avoided at all costs. But our bank channels had dried up, so we had no choice. Factoring has enabled us to double our business, and, everything considered, costs us less than other forms of financing."

European Expectations. The services that factors offer their clients are some times more valuable than money. Factors keep teams of experts checking on both their clients and their clients' customers, feed their clients a steady stream of advice and business tips. In one recent maneuver, Textile Banking Co. lent $400,000 to a builder so he could buy carpeting from a manufacturer for which T.B.C. is the factor.

In view of the risks they take, factors lose remarkably little through bad debts: their loss rate is only about one-twelfth of 1% on volume--a rate that compares favorably with the losses sustained by banks. Competition holds down factors' charges to around 1% to 2% of the value of the accounts they factor. For higher earnings, factors look to increased volume. Their fondest hope is that President Kennedy's new trade expansion bill will spur new interest in European sales among small and medium-sized U.S. companies. Already factors are planning overseas operations to handle accounts in lire, kroner, pounds, Deutsche marks, francs and just about every other currency in which accounts can be receivable.

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