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Factors & ABLs: What’s Your Funding Strategy?

April 13, 2016, 07:00 AM

Many factors and asset-based lenders are now experiencing historic, extraordinary economics and emerging dynamics in their marketplace. It is a response to the continuing, long-term policies of the Federal Reserve to suppress interest rates at near zero (even with the possibility of negative interest like some foreign governments have entertained). This is influenced by an abundance of innovative technology enabled new financing platforms, which are now competing for equity investments and financing.

For example, merchant cash advance business models have been very noticeable, gaining some status and respect. There are now entrepreneurship peer-to-peer platforms turning up nearly every month. They have begun filling the vacuum where the banks in large measure have curtailed their lending. I believe factors and ABLs have lost time sensitive deals because of efficient technology and platform creation.

Many factors and ABLs have traditionally used credit lines and financing provided by banks. Since the 2009 enactment of Dodd-Frank, banks have increasingly restricted their activity here as their means of regulatory compliance.

It becomes advantageous for factors/ABLs to be pro-active and to deal from a position of strength as the best strategy to navigate current mercurial economic conditions. From my perspective, there are many private equity investors with lots of cash who are potential sources of credit lines and financing. They are institutional (not retail), non-bank lenders, sometimes family offices, looking to put money to work in verifiable, bona fide investments both on the debt and equity sides. (This could take the form of structured equity, senior secured, unsecured, mezzanine, and more -- as long as it reflects quality.)

How can factors and asset-based lenders properly present themselves for these prospects?

In response to the competitive threat I described, factors and ABLs must demonstrate renewed invigoration in product creativity, along with aggressive marketing. They must be able to show how they can effectively function in this latest environment.

A proactivity makeover should be a priority because realistically, the transaction process to raise capital typically runs four to six months or longer. Contenders for this funding must prove management depth and past successful experience. What is the strength and skill of the management team? What is their credibility and track record?

This investment community wants to see factors and ABLs who practice strong underwriting, with strong financials, and with validated tracking/auditing systems. (From where I sit, the larger factors and ABLs appear to have auditing controls which meet standards and “best practices”. The small-to-mid-sized firms appear to have improvement issues here.) These money sources want to see marketing programs in place that have helped to grow the business.

The factors and ABLs must prove they have been able to put money to work responsibly. A case must be made to the funding source that there is a true deal flow pipeline for money they provide.  The diligence must show how income is being generated. All of us know that anybody can put money out, but it can become very hard to get paid back.

For example and as of late, there have been some pivotal disruptions in retailing among mega-institutions like Macy’s Walmart, Target, Sports Authority, Sears and more. There is widespread concern about how major retailers will have the ability to make payment on invoices generated by the manufacturers, wholesalers, distributors, and suppliers financed by ABLs and factors.

However, there is less concern given to the type of industry sectors where a factor or ABL is engaged.  There is greater emphasis on the collateral coverage, the ability for the firm to get paid, whatever the industry. Investors are more inclined when they see heavy equipment for example with decent asset valuations and easy liquidity. They are interested in the underlying quality of the receivable itself. It is somewhat advantageous for the investor to see diversity of industry rather than specialization tied to one or two select sectors. Has the factor or ABL previously been hurt by any large loans or loans specific to a sour industry?

And these investors like to have appropriate, legal oversight -- but they do not want to get caught up in any micromanaging. Again, quality management teams with measured overhead who know what they are doing, putting money to work responsibly.

In these scenarios I become the synthesizer, the chaperone looking to put together a harmony of the capitalization with the culture of a factor or an asset-based lender.

With this whirlwind of new financing paradigms that is making many factors and ABLs reconfigure the way they do business, there is going to be a bust among the streaming, digital financing enterprises at some point. Factors and ABLs enjoying the strength of underwriting should have their pick on a number of “bargain” acquisition candidates.

Robert Bolandian
Partner, Global Investment Banking Head | Cambridge Wilkinson, LLC
Bolandian has 25 years of investment management experience across a broad range of asset classes including private equity, hedge funds, long/short equity, real estate, fixed income and mergers and acquisitions. Mr. Bolandian was a Senior Executive Vice President at MBNA, a $35 billion mono line credit card institution. Bolandian has his Series 79 & 63 licenses.

Cambridge Wilkinson represents clients seeking $10 million to $500 million of debt or equity financing as well as advisory for mergers and acquisitions. Cambridge Wilkinson also provides a full suite of specialty finance services including: factoring, asset-based lending, purchase order finance and equipment finance. Our team is industry agnostic and has deep experience across a broad scope of domestic and international engagements.

Cambridge Wilkinson provides a full suite of investment banking services for its clients. The firm has a strong track record of identifying and structuring debt and equity finance solutions, as well providing deal advice in merger & acquisition transactions. The firm is industry agnostic with extensive expertise in healthcare, specialty finance, consumer finance, real estate, sports & entertainment, infrastructure, technology and transportation businesses.
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