May/June 2011

Stick to the Basic Principles: Sage Insights From a Factoring Legend

Having started his career with Standard Factors Corporation in 1949, Louis J. Cappelli, chairman of Sterling National Bank, is enjoying his sixth decade in the commercial finance industry. Based on a wealth of experience garnered from his illustrious career, he shares with ABF Journal his evaluation of the current environment and future opportunities for factoring, as the industry finds its post-recession footing.

Beginning his career shortly after his high school graduation, performing office errands for Standard Factors Corporation in 1949, Louis J. Cappelli learned the commercial finance business from the bottom up. His career development and responsibilities grew as he worked in every department of the company. In 1968, when banks were acquiring independent commercial finance companies, Standard Factors bucked the trend by acquiring Sterling National Bank. Cappelli, who has served as chairman and chief executive officer of Sterling’s holding company since 1992, assessed the current environment and future opportunities for factoring, as the industry finds its post-recession footing.

With its primary focus on business banking, Sterling offers traditional factoring, collection factoring, accounts receivables management services, letters of credit and inventory financing. Cappelli explained that line factoring has been a part of this country’s commerce since the English were trading with the colonies and adds, “Any product that has been around that long has to be a good product.”

Cappelli noted that old line factoring was primarily focused on the textile, apparel, and furniture businesses whereas factoring today can be utilized by virtually any company selling its products to major retail chains. In that regard, he explains, “We here in New York have found business to be level with the prior year, which was very strong, taking seasonality fluctuations into account.”

Assessing Sterling’s accounts receivable financing, Cappelli says, “For us the business climate has been robust. We are in the New York market, so we have diverse business activity. There are many different kinds of businesses here. We have had growth in our trade finance business and issuance of letters of credit as well. So from a business activity point of view I’d say it’s been quite satisfactory.”

As the strengthening economy presents greater opportunities for factors, assessing risk in underwriting is instrumental in assuring successful deals. Risk management is a significant aspect of the factoring model, especially when prospects may be subject to financial stress. Bottom line, the factor must be able to collect the receivables it finances. While not undervaluing the importance of due diligence, Cappelli is optimistic about underwriting potential clients as the economy improves. He explains, “It would occur to me that if business activity picks up, the underlying credit quality of prospects should improve. Generally the financial health of retailers has been improving over the past couple of years. With the improvement in retailers’ sales volume, their financial strength should improve. I’m encouraged about that outlook.”

Despite Cappelli’s positive outlook regarding prospects’ improving credit quality, he is quick and to the point when identifying common mistakes that some factors make in regard to portfolio management: “Over extending credit. Being too liberal. Competition forces people to be liberal. But basic principles should not be violated, and if they are, you will pay dearly for it. Such as being much too aggressive with advance rates, not charging a rate that provides you with a profit, or being aggressive in seeking volume. Sometimes startups do that because they need to get started, and they’ll do things that are not necessarily as sound as they should be because they don’t have enough capital to expand,” he explains.

A challenge to the factoring sector, Cappelli notes, are companies entering the business that are overaggressive in extending credit and “disruptive pricing” for the industry as a whole. He continues, “When you have a product, you have certain costs. And after the cost, you earn a profit. If you don’t price your merchandise properly at the top, you’re not going to have a profit. And we’re all in business to make a profit.”

Another challenge facing factors as the economy strengthens is handling an increase in volume. While business growth is a desirable goal, mismanaging expansion could prove detrimental to overall success. Cappelli explains, “It’s a question of volume and how you deal with the increase in volume, so that you increase your processing capacity and efficiencies. The better your improvements, the more clients or markets you can service. That’s the challenge — how you process, how you efficiently run your business? Instead of increasing to 100 people, can you find ways to run the business with 70 people? And that includes incorporating new ideas that come about, such as the constant evolutions in technology and using IT to improve your profits.”

Overall, Cappelli is confident regarding the factoring sector today and moving forward. He notes, “The factoring sector continues to improve. I’m optimistic for the future. I think the worst is likely behind us. Employment is slowly beginning to heal; it’s going to take time. Low interest rates are favorable for borrowers. I’m encouraged and optimistic. Yet, there are always challenges. You need to focus your business to deal with issues that come upon you every day. That’s the difference between success and failure.”

One effect of the improving economy on the factoring sector is competition — a fact that Cappelli does not view as an obstacle, but rather as a reality of conducting business regardless of the economic climate. “There’s always competition. It comes in different places and at different times. Even when there are fewer players, there is still competition. You have to be alert,” he advises.

Although larger factoring companies are faring well in the post-recession climate, smaller factors are still having difficulty obtaining financing for their own companies. “Those companies out in the smaller communities are going to local banks that may not have the same capabilities that Sterling does. We have lots of products, we are in the city, and we have been in this business for many, many years, both as a factor and bank. So, we are able to see both sides of it, and actually have extended lines of credit to some smaller factors,” Cappelli says.

Having started his career in factoring, Cappelli still remains dedicated to the sector: “It’s a fine business. If done properly, it is a good product. Old line factoring has been around in the U.S. since the 1600s. The execution of it is different, but the basic principle is the same now as it was then — extend credit and get your money back. Always get your money back. That’s the answer.”

Lisa M. Goetz is an associate editor of ABF Journal.