Financing Through Factoring Businesses Can Get Quick Cash From Factors

‘Factoring” increasingly is a key factor in the success of a number of Spokane companies.

Factoring helps put meat in supermarkets.

Factoring replaces minivan windshields. Factoring fills truck fuel tanks.

“Factors,” as those who do factoring are called, finance thousands of transactions a day in many industries. Their importance as a source of funds for new businesses has increased as banks withhold more traditional types of financing.

Factoring can be expensive for customers and risky for the factor - but it also can be highly beneficial to both.

“Companies live and die by their financing,” said Jeff Pyatt, president of Pacific Financial Services Corp.

Rare in Spokane a decade ago, factors have since multiplied. So has their importance to the Spokane economy. And at least one bank, Inland Northwest, has begun to offer the service.

Jim Fluegal’s experience with factoring is typical.

A year ago, the Post Falls businessman searched for a loan to start American Home & Auto Glass.

Banks, he said, wanted his home as collateral, despite his excellent credit record.

So Fluegal went to a factor, and from a standing start generated $200,000 in gross revenues. He estimates working with a factor boosted the total by 30 percent.

Just what is a factor?

Factors buy accounts receivable from businesses, who are paid less than face value on invoices, but get their money immediately instead of waiting a month or more.

Fluegal, for example, makes up a customer bill and sends a copy to his factor, Inland Financial Corp. Inland cuts him a check on the spot.

The amount reflects a reserve in addition to the discount. As customers pay, the amounts held in reserve are returned.

Because he does the billing using Inland’s address, Fluegal said, many customers do not even notice their checks are not going directly to him.

“They think I have two offices,” he said.

Fluegal employs four. Another new auto glass business factored by Inland - American Auto Glass - employs 23.

“It’s to our benefit, the quicker the customer pays,” said owner Dave Nibarger, who became familiar with factoring when he operated a computer business.

Inland President Henry Wozow estimates that the businesses he works with employ more than 500 people in the Spokane area.

Truckers, who are long-time users of factoring, are the biggest beneficiaries. Major clients also include printers, contractors and employment agencies.

About 85 percent of his clients are startup companies, he said, with companies working their way out of bankruptcy or resolving tax problems among the rest.

“It helps save companies,” said Wozow, who first worked with a factor when he operated a printing business in Bellevue.

He was doing $100,000 in business with a $3,000 bank line of credit, he said. Without factoring, he would not have been able to grow a business he sold for millions after 20 years.

With that money, Wozow went into factoring, first on the West Side and, since 1994, in Spokane. Inland’s business has tripled every year, he said.

Wozow and members of his family were sued in March by the trustee handling the bankruptcy of the factor they once owned on the West Side. Wozow dismisses the suit as “frivolous.”

One pioneer of factoring in Spokane is AMCI Finance. President Bill Schweiger opened the doors in 1985 after briefly representing a factor he encountered in his work as a business consultant.

Factoring was little known at that time, he said, and the business was suspect. Clients were regarded as bad credit risks and many factors were themselves considered fly-by-night.

“People see it as a way to make easy money,” Schweiger said. “The field is littered with fatalities.”

But Schweiger says factoring has nurtured company growth. Huntwood Industries, one of his clients in the late 1980s, now has 400 workers.

President Tim Hunt said Schweiger took the time to understand the cabinetmaker’s needs. AMCI funding helped carry Huntwood until it became more bankable, he said.

Schweiger said fast-growing companies like Huntwood are ideal for factoring. Although more expensive than conventional lenders, factors allow start-ups like Fluegal’s to do additional business that more than makes up for the cost, he said.

Pacific’s Pyatt said the factoring costs reflect the risks factors take when they buy invoices. “You lose money quickly if you don’t know what you’re doing,” he said.

Pyatt is based in Bellevue, but does half of his business in Spokane. He said he wants to open an office here, or purchase a factor already in the area.

Competition on the West Side, Pyatt noted, is much more intense than in Spokane, particularly for accounts that do more than $1 million a month or more in invoices.

Local factors said competition has also become heated in Spokane.

Some clients are paying half the discount they might have five years ago, said Gene Slatter, president of Commercial Finance Inc.

Commercial Finance handles small accounts, between $30,000 and $40,000 per month, he said, and he visits with most of them every week.

Slatter said turnover has been surprisingly small in the seven years he has been in the business. Some customers just hate banks, he said.

But Inland Northwest Bank has joined the list of companies that will provide factoring to local companies. Executive Vice President Randy Fewel said about 2 percent of the bank’s assets are dedicated to factoring.

“There’s a real need out there,” he said.

Fewel said the bank does its usual rigorous underwriting examination when factoring, and may even audit accounts receivable.

To protect itself further, the bank buys insurance on the invoices that kicks in unless there is a dispute over performance, or fraud.

Fewel said factoring enables Inland to reach accounts that can gradually develop into full-fledged bank customers.

He said bankers used to look down their noses at factors, but have come to appreciate how valuable the funding can be to highly leveraged companies.

Inland will grow its factoring operation as it grows the rest of its operations, Fewel said.

Other Spokane factors are trying to grow by seeking out more small and midsized accounts over a broader geographical area and in more industries.

Wozow, who accepts invoices from all over the U.S. and Canada, recently launched an Internet site to attract more business.

Pyatt said factoring is still a relatively immature industry except in strongholds like the garment industry. With fax machines and other technology, he said, companies can obtain invoices from anywhere and transfer money to customer bank accounts within minutes.

Schweiger has taken AMCI into flooring financing and equipment leasing.

Long-range, he said, reliance on factoring will depend on what other funds are available.

“Yes, it costs a little more - but it works,” Schweiger said.

, DataTimes ILLUSTRATION: Color photo