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Factoring Firms See Signs of a Recovering Economy

More local businesses are fielding larger orders from their customers and even have back orders, a clear indicator that the economy may indeed be recuperating, according to one longtime San Diego financier.

Pat Spencer Burns, president of Primary Funding Corp., a San Diego-based factor, says for the first time in more than a year, some of her clients tell her they’ve got back orders for their goods and services, and a few are expanding their payrolls.

Factors provide financing to businesses by buying their receivables. The financing is more expensive than a bank loan, but more accessible to startups and small firms that have little or no collateral.

“I’m hearing from my clients and some prospects that there are back orders, that they actually have orders for the next month. It’s not day-to-day,” Spencer Burns says.

Last year, many of her clients were forced to lay off in droves as they coped with impacts of the recession on their businesses. Somehow, many of them made it to the end of the year, and are now clawing back to life, she said.

The activity isn’t robust by any means, she says, but has increased to the point that Spencer Burns says she’s expecting her factoring business will do better this year.

Bill Lovejoy, president of Republic Moving and Storage in Chula Vista, says he could have obtained a bank loan but was concerned about overextending his debt, and preferred to finance his company’s operations by selling invoices to Primary Funding.

The money may be a bit more expensive, but it’s much easier than getting a loan and more efficient, Lovejoy said.

When Lovejoy purchased the moving business in May 2008, Republic was doing about one move a day, and had a single driver.

Young Businesses Turn to Factoring

As of last month, the business had grown to 18 drivers, 19 office support staff, and 43 movers for a total of 80 employees. In its first year under new ownership, Republic did $795,000 in revenue. This year, Lovejoy says he expects to generate about $5 million in revenue.

Lovejoy says he’s selling about 70 percent of his invoices, and likes the arrangement he has with Primary Funding. “When something is working well, you don’t mess with it,” he said.

He’s been contacted several times by Bank of America to obtain a line of credit. The bank even sent Lovejoy an application that he considered filling out. However, he realized that would take one to two work days to complete the application. “I don’t have one or two days to do that,” he said.

Many of the businesses that use Spencer Burns’ factoring service are similar to Republic Moving, fledgling businesses that have small staffs that usually don’t include billing and collections people, she says.

In addition to providing advance funding ranging from 70 percent to 90 percent of the total value of invoices, factors provide credit management services that prescreen the clients, and collect payments. Primary Funding gets 2 percent to 5 percent of the total invoices against which they lend for the use of their money.

Last year was the worst ever for Primary Funding, which was founded in 1994, Spencer Burns said.

“I first started to see the slide in September of 2008, and by the fourth quarter our sales were down 35 percent,” she said, declining to reveal actual dollars. For the first quarter of 2009, sales dropped 48 percent from the first quarter of 2008, she added.

Some of Primary’s customers were refugees from banks who had their credit lines cut, or had terms amended to the point that they couldn’t get the funding they needed.

Cash Flow Is Most Important

The banks warned many businesses that if their sales didn’t improve, they wouldn’t have access to the credit lines by the end of the year, she said.

“Now they realize that cash flow is the most important thing that they have,” Spencer Burns said. “If the bank isn’t lending it to them, they have to find it someplace else, and they’ll have to pay a little bit more for that money.”

The situation for both Primary Funding and many of its clients began improving starting in the second half of last year and has continued into this year.

“I’m now working on 10 (potential) deals, and I should get about six or seven of these. It’s very unusual for me to be working on that many accounts,” Spencer Burns said.

Among Primary Funding’s prospective clients are a metal coating business, a machine shop, an information technology servicing firm, a tire recycling business, a women’s handbag and accessories maker, and a winery, she said.

Businesses that have little or no collateral but can prove cash flow, such as staffing companies, make excellent candidates for factors. If businesses can prove that their customers are creditworthy and are dependable they can qualify for the advance funding, says Spencer Burns.

Though times have been tough lately, Primary Funding continues to maintain a client list of about 50 to 60 companies, about the same average the company has maintained for many years. The company serves its customer base with four employees, down one from the prior year.

According to Spencer Burns, not all clients use her services all the time. Many move in and out of factoring financing, depending on their needs. Most businesses tend to use factoring for two to three years, but some have stayed on longer than five years.

Janice Tegman, marketing manager of Freight Capital, a division of factoring firm Capital Partners in Carlsbad, said many of her company’s clients were also seeing increased growth.

“I saw signs (of growth) in the fourth quarter which is usually one of the slowest, and now it’s really picking up,” said Tegman. “As consumers come back, there’s more demand for finished goods, and that results in more trucks moving those goods.”

Freight Capital specializes in buying receivables of companies in the logistics industry, mainly trucking companies.

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