From the 1983 movie, The Big Chill:

Michael (Jeff Goldblum): I don’t know anyone who could get through the day without two or three juicy rationalizations. They’re more important than sex.

Sam Weber: (Tom Berenger): Ah, come on. Nothing’s more important than sex.

Michael: Oh yeah? Ever gone a week without a rationalization?

Has the factoring market rationalized? Factoring veteran Tom Siska warns us not to put away our protective gear … the Big Chill of 2008 probably won’t full thaw for quite some time.

Well, I could say “yes,” but that would just be an empty rationalization. I am, of course, answering the former question, “Has the Factoring Market Rationalized,” not the latter. While some areas of the market have stabilized, others have not. The Big Chill of 2008 hasn’t fully thawed. And we’re probably looking at years, not months, for all the effects to melt away.

New Business

Most salespeople find that their pipelines remain pretty full, albeit lighter than earlier in the year. But all is not as good as the numbers appear. The quality of most prospects continues to be poor, although overall quality has improved as the “worst of the worst” companies have gone out of business by now. The balance of desirable leads tends to be highly shopped, thereby requiring very competitive rates, structures or both. And even when a proposal has been won, there is a lot more time and work involved to close the deal due to the many moving parts caused by the economic decline.

Overall, there are fewer businesses in existence today than there were two years ago. So demand has ebbed considerably. However, the supply of factoring capital has not adjusted nearly as much. While many smaller factors have seen their access to capital severely curtailed resulting in some limiting of the supply, there continues to be an environment in which new factors are starting up operations at a fairly regular pace.

The financial market collapse of 2008 displaced many people with experience in the capital markets that have now been lured into the factoring business by the potential of attractive yields. So overall, supply still outstrips demand. However, factors that can handle clients in excess of $2 million in funds employed have seen companies apply today that would have never before considered factoring. Most of these potential clients saw their sales volumes halved between late 2008 and early 2010. With their equity decimated and consecutive annual losses in the rear view mirror, these firms have been forced to seek out capital from specialty asset-based lenders and factors.

There is also less capital available to start a new business. While the overall decline in available professional capital (venture capital, private equity, etc.) is bad enough, there is also an inability of the part of budding entrepreneurs to be able to bootstrap capital through personal means (second mortgages, borrow from retirement accounts, etc.) or from friends and family. This will lengthen the cycle to replenish the number of businesses lost during The Great Recession.

Then there is the old enemy, the community banks. They are coming back with a vengeance — not because they are suddenly in excellent shape with excess liquidity to deploy. On the contrary, these banks are sitting on piles of underperforming and non-performing loans. The vast majority of which are backed by real estate. So as the community banks try to put on new performing loans, they are forced to look mostly at commercial and industrial (C&I) loans not based on real estate. This further thins the available pool of potential small business clients, especially for those loans in the community bank target size of under $2 million.

Portfolio Conditions

Factors, in general, are experiencing a stabilization across their portfolios. Internal sales growth from existing clients was significantly negative in 2009. This year, the businesses that survived the recession have seen sales volumes flatten out or even grow a little. In addition, business owners have had more time to adjust their cost structures as best as possible to the new realities of today’s economy.

The new business that is being put on the books by factors is of at least slightly improved quality over last year’s highly distressed deals. There is one element that hasn’t yet changed, however. Business owners are still irrational in their expectations. Most still believe that they should qualify for bank financing and that bankers’ conservativeness has led to their need to factor in the first place. Prospects negotiate every aspect of the factoring program and expect advance rates exceeding 85%, validity guarantees, short-term contracts and “limited” notification. And with the oversupply of factors chasing fewer qualified borrowers, clients are sadly being somewhat successful in their negotiations.

Debtor performance, on the other hand, has greatly improved. Bankruptcy filings of Fortune 1000 companies have dropped precipitously. And the companies that may yet file, at least, will not come as a surprise to anybody, just as Blockbuster’s recent filing came as no surprise. Payment patterns have returned to some semblance of normal, making it easier to spot problems. Dilution remains high, however, as buyers squeeze everything they can out of the supply chain.


Fraud conditions remain high. While 2010 has certainly been less of an economic disaster than the preceding year, financial stress not only lingers but over time actually builds up and worsens. This fact is bad enough as it pertains to our business clients. But the other, more dangerous aspect lies with the owners themselves. Individuals were as over-leveraged as corporate America was heading into the latter half of 2008. And while business conditions have improved, they have certainly not rebounded completely. So income is down even for the survivors. This lower income will not cure some over-leveraged situations and with time could grow to their breaking point. Therefore, more emphasis needs to be placed on owner due diligence and ongoing monitoring of their personal financial condition than ever before.

Are We ‘Out of the Woods?’

To think so would be a gross rationalization. The Federal government can declare that the Great Recession ended in June 2009, but taking our tax dollars and creating economic activity is not a “fix.” On a macro level, serious economic threats remain. State and local municipalities are in danger of defaulting on obligations for the first time since the last recession. Harrisburg had to have the state of Pennsylvania advance it money to avoid a bond default. California, Illinois and several other states are running dangerous budget deficits. The unemployment rate is still high at 9.6% with another 8% not working but not counted as “unemployed” because they are no longer receiving unemployment benefits. One in seven people live below the poverty line. Home foreclosures rose in August in several states, reflecting no end in sight for the housing debacle. Small business bankruptcies were up during the first half of 2010 even over the terrible 2009 rate.

On a micro level, the number of good factoring prospects is down while the number of competitors has remained fairly steady. Prospects continue to be irrational in their expectations forcing factors to rationalize lower rates or riskier structures to win the business. Don’t put away those winter clothes just yet. The Big Chill won’t thaw until at least 2012 and maybe beyond.

Thomas G. Siska is the president & CEO of Working Capital Solutions, Inc., the small asset-based lending and factoring subsidiary of WebBank. Siska is a 25-year industry veteran, who has built several finance companies from the ground up and orchestrated one of the most successful turnarounds in the small ABL niche. He holds degrees in Finance and Marketing from DePaul University in Chicago, and received his M.B.A. from the University of Chicago. He can be reached at