Community Factors...A Bit Saltier Than Most

By: Pat Burns, Primary Funding Corp.
ABL Journal
April 2003

When Stuart Papavassiliou asked me to write this article, I leaped at the opportunity. I have been looking for the chance to describe what Primary Funding, and firms like mine, do for small businesses and to contrast this to what banks and the Big Guys (big national factoring firms) do. I call our breed "Community Factors" or "Community-Based Factors."

Well, besides being clearly better then the rest of the commercial lending industry, community factors have several other distinguishing characteristics. The following are a few of these:

• Our customers are typically very small companies
• We, like our customers, tend to be small companies too
• We tend to do business in our own backyards
• We live and die with the local community's economy
• We typically provide more service to our customers
• We often take on deals our bigger brethren wouldn't touch

Small Customers - I don't need to say much about the smallness of our customer base - you readers all know what I mean. Over the years I have worked with companies as small as $100,000 in annual revenues, literally working out of the family garage. I remember Tom Morey manufacturing boogie boards in his garage. We factored accounts such as Deering Banjo and Taylor Guitars when they first started out. Today they are household names within their industries. Okay, our customers often start-off small, but given the support of a firm like Primary Funding they can be nurtured and eventually capture their dreams. Not all of the companies that we factor become nationally recognized. However the regional successes are numerous.

And with the consolidation of the financial industry making the Big Bigger it has left many more small and even medium sized companies without financing options. I must confess, as more of the mid sized factors and banks are bought up by bigger institutions, this consolidation has left more and more of the small business segment underserved. We too have moved up in size, although we still strive to serve the smallest of businesses as well.

Small is Beautiful - Our customers are small, but hey, so are we! While my company today is quite large compared to where we started, (today I have offices in San Diego and Phoenix), I started my factoring career in 1974 with a very small firm. I went to work for a three-person San Diego factor that had just been acquired by a small finance company from Redondo Beach. Factoring at that time was a financial service tool used primarily by those in the garment and textile industry. This Redondo outfit liked the trucking industry and San Diego with its cross border traffic seemed like a natural market, so we got acquired.

At the time, I was unfamiliar with the factoring trade - heck, let's be honest, at the time I was unfamiliar with business! My most recent relevant experience was loaning one of my four brothers money to finance our lemonade stand. By sheer luck, I wound up working for this tiny company from Redondo Beach called Riviera Finance. Yes, in 1974, Riviera Finance was a small community factor too. In fact, I remember the day we reached a million dollars in monthly purchased receivables. John Danis called to tell us to break out the champagne. Even accounting for the difference in the value of a dollar from then till now, that was only about $2.5 million in today's dollars.

Doing Deals in Your Own Backyard - Riviera was not the first community-based factor, but is my first image of one, and has been the training ground and model for many small factors like me. We did deals in our own backyard. We kicked the tires (literally when we did trucking deals) and wrote checks in the field. We collected money the old fashion way - we'd ambush the owner on the way to work outside his loading dock or we'd hang around his reception area till he had to go home and face us. The trucking industry had its own unique problems. They would "lose loads" - sometimes unintentionally! There were no omni-track or GPS systems in those days. I remember one time having to take a truckload of bicycles as payment. For a few months we became the "Pat Burns Factoring & Dirt Cheap Bicycle Company!" But I got repaid. Yeah, we were so small in those days; the annual Holiday Party only needed a "Three-Pack" to have a good time.

Today of course factoring is managed very differently. The evolution of electronic commerce and the ability to collect and distribute credit information has expanded our capabilities. However, the premise of community factoring remains the same: stay close to home.

My company, Primary Funding Corporation is a community factor, and like most, we tend to do most of our business in our own backyards. My "backyard" has become a little bigger over the years with branches outside my original city, but that local characteristic still holds true. And today, there are literally hundreds of independent community factors. We typically have local personnel who know the territory, and represent the firm in the geographic area(s) they serve.

Live and Die With the Local Economy - In many respects community factors are very similar to community banks. They like we, limit our geographic reach, and serve small companies. We also share an unenviable characteristic - we live and die with the local economy. In the 1980's they were livin' high in Silicon Valley, but in Houston the oil bust of the 80's made Texas banks and factors suffer. These days just the reverse is true. There is a tech bust in Silicon Valley and an oil boom in Houston - go Houston! I can tell you personally, when aerospace suffered through the "Peace Dividend" in the early 1990's there were not a lot of dividends for San Diego community factors.

Service, Service, Service - Well enough moaning about the disadvantages of being a community factor. Let's look at the advantages. We know our territory, we tend to know our customers, and we provide much more service than the Big Guys or banks can. Community factoring has been, and will remain, a service business. The industry is labor intensive and loaded with risk. The community factor likes hands on deals whereby the factor can easily reach out and visit their client. The community factor can also take over certain functions of his customer's business and perform them better than the manufacturer or service provider. These include credit evaluation, credit management, A/R management, collections, workout support, and more. These services can be critical to small businesses that the community factor supports. In more than one instance, I have assisted a company through a tough time only to see them right the ship and become once again bankable. If I had been operating from New York City I could never have taken on that customer with his problems. Community factors provide a real service to small business by being close and being able to help support areas of financial management weakness for their customers.

Hairy Deals - This "hands on" approach also allows the community factor to manage what would otherwise make a factoring relationship impossible for a large factor, or a bank. Yes, we do "hairy deals" sometimes. That is because we are close to the action, we can take the time to assess the risk more clearly, and we can stay closer to the customer to monitor the risk over time. I like to think that we are also by nature a more creative bunch. We find a way to make a deal work, not find a way to turn it down. You can't do that with a bunch of "fresh faced" MBA's with no real life small business experience. In fact most MBA programs focus on a much larger scale business model.

Community factors tend to be a little bit saltier than most, but that allows us to figure out how to tailor a service to meet the needs of the small business customer. If the truth be known most of us rely more on our sixth sense than on all of our academic training. I personally rely on body language to initially qualify my clients. I want them to tell me that I can trust them, not verbally of course but, through the way they describe their business. I watch the way they treat their employees and watch for mutual respect.

Recently, I bought out a competitor on a "Hairy" post petition factoring deal. They didn't want any part of this deal. They of course were not local and were for that matter not even in the State. When I went to the Bankruptcy court this poor man who turned 77 just last week was deemed practically dead. Trust me this wonderful individual is anything but dead. He had had this machining business for more than thirty years. His passion for the business is what brought me into the deal. If he had been younger and had had the opportunity to start over, I would have passed.

This entrepreneur is still struggling but he has the passion to succeed and I believe he will. He tells me weekly he could not have gotten this far without my help. He has been humbled by this experience but is open to any ideas that seem reasonable. I helped him find new legal counsel and assisted him in developing a marketing plan. These are the added values of working with a Community based factor. We too have the liberty for more passion to do what we do.

Conclusion - In conclusion, community factors provide a very valuable service to small businesses in their regions. As a regional resource a community factor can form the fabric which holds the support system together for small business. No other provider can and is willing to provide service on this level and with this creativity. I think we have been under-appreciated as a small business community resource, and we need to begin thinking of our industry in these terms.

Ms. Burns is the President of Primary Funding Corporation, which has offices in San Diego and Phoenix. She serves on several Boards of Directors, and is active in the Southern California business and philanthropic communities. She has been a factor for over 30 years, and can be reached at 858-530-1500.