In a Q&A with Commercial Factor, representatives from factoring companies in various regions shared their experience during the first five months of the COVID-19 pandemic and how their companies are fortifying in the face of rising case numbers and more economic hardships.
BY PHIL NEUFFER
Factors across the country have already been dealing with significant challenges related to the COVID-19 pandemic but as cases rise, there is a need to plan ahead. To get a better view of the current status of the industry, Commercial Factor spoke with factoring leaders from Franklin Capital Network, 12five Capital, eCapital, TradeCap Partners, North Mill Capital and Versant Funding. The panel detailed how they handled the initial onset of the pandemic and the months that followed as well as their plans and concerns for continued economic upheaval and a potential return to lockdown restrictions.
What has changed for your company since the COVID-19 pandemic began?
SUE DUCKETT, EXECUTIVE VICE PRESIDENT, FRANKLIN CAPITAL NETWORK: We were proactive in our disaster management and had thankfully prepared for this. Like most others, we are constantly on Zoom meetings and using mobile apps that make the experience more efficient and manageable. We have been and continue to be inundated with requests to fund PPE deals. The conversion rate on these deals is low as there is a lack of historical trading and basic financial information along with requests for substantial funding. Many have too high a risk profile for us to consider.
RYAN JASKIEWICZ, CEO, 12FIVE CAPITAL: Fortunately, we had been effectively remote for the prior five years before the shutdown. This made it so our operations weren’t really impacted by any technology or workflow issues. I never saw this as the reason we were practicing to work from home, but I am thankful we had been.
CHARLES SHEPPARD, PRESIDENT, ECAPITAL FREIGHT FACTORING: I think the question should be what hasn’t changed? Getting the whole workforce into a remote environment operating at the same level of efficiency definitely presented a series of challenges. That, combined with supply shortages due to the initial supply shock related to the outbreak in China, compounded [the] issue. We saw also some significant swings in volume. We had previously moved to a largely digital origination and documentation strategy, which has served us well during this time.
CLINTON STANTON, MANAGING PARTNER, TRADECAP PARTNERS: Operationally, things really haven’t changed much. The biggest impacts experienced were on deal flow and debtor credit. For about a month after the onset of the pandemic, business in general really fell off a cliff. We saw a significant increase in PPE requests, all of which involved 100% prepayment to overseas suppliers. We initially shied away from a lot of PPE, and now, as things have settled down, we’ve been able to find opportunities that can be structured properly with experienced companies in the space. As the environment evolves, we’ll have to continue placing emphasis on assessing the credit and cash flow of our clients and their customers.
DANIEL F. TORTORIELLO, EXECUTIVE VICE PRESIDENT, NORTH MILL CAPITAL: It’s really changed just about every aspect of our business. On the new business front, before, our new business people would sit across the table from a prospect to learn about their business — this is now a Zoom call. Also, with three operating locations throughout the country, each in different regions, with 48 employees, there are different issues to address, not to mention the most significant being all employees now work[ing] from home and we need to address how, if and when we come back to our offices.
MARK D. WEINBERG, PRESIDENT AND CEO, VERSANT FUNDING: In many ways, things have become much more difficult, but in many ways, it’s just been business as usual. The nature of the deals has changed. For months … all we saw [were] PPE deals. And we wasted so much time on them because a lot of them were just clowns calling who didn’t really understand the business. It’s been difficult, and yet we’ve been very lucky in that our clients, for the most part, have also been business as usual.
How has the situation evolved as states reopened the economy?
DUCKETT: We have seen debt age out on our factoring portfolio; however, it has now come back into line, and our clients are seeing more available funds from eligible invoices. Many of our clients had taken PPP funds; however, that money is now running out, and they are looking to increase their sales where they can.
JASKIEWICZ: Every state was treating it differently, so that was something we had to keep an eye on. We just tried to encourage our team to be safe and not take any unnecessary risks. The challenge is that you can’t control neighboring states, so we have just told our team that we won’t be traveling or meeting in person for the foreseeable future. None of us at 12five have a degree in epidemiology, so we are just going to lean on the experts and be extra vigilant.
SHEPPARD: This March was an extremely strong month probably due to the replenishing [of] the shelves. April and May, we saw the trend reverse. We had a 20% drop in April and another 20% in May, with an equally remarkable rebound again in June and July.
TORTORIELLO: We have been able to continue to close business throughout the current pandemic. New business has been industry specific. Most notably, it has been with PPE products and in food distribution. We gravitated toward those industries that were having an uptick in business.
What is the feeling in your state right now?
DUCKETT (ILLINOIS): Although I do not know for certain if a second lockdown will happen, I am unquestionably hoping it does not. Chicago has not seen the same increase in cases as other states, but the current statistics are not faring well. If the numbers continue to increase, our governor has made it clear that he would not hesitate to put enforcements in place reversing the current reopening schedule.
SHEPPARD (CALIFORNIA): I think the fact that California got hit pretty hard, especially initially, it forced us as an organization to really face the issue head-on and to do it in a relatively quick way. Even though the state has started opening up, we have not transitioned staff back into the office. We’re still very much operating as we were three weeks after this started.
STANTON (TEXAS): I think it’s being taken more seriously now, I would say, than it was at the onset. Despite the increase in cases [in Texas], we’re not really moving backward from a reopening standpoint. We’re just standing still.
WEINBERG (FLORIDA): I think that we could have a thousand deaths a day and we will not have a second shutdown in Florida. That’s just the way it’s been. Unfortunately, it’s become a political issue and the Republican states seem to think there’s no issue and the Democratic states are a little more receptive to science. So I don’t believe there’ll be a second shutdown in Florida and even so, it wouldn’t affect us because we were deemed, and I would hope we would continue to be deemed, an essential business.
What plans and concerns do you have in relation to a potential recurrence of lockdown measures?
DUCKETT: We will be working from home for a long time, likely through 2021. Our business runs well this way and customer service has not deteriorated, so we are comfortable internally. We cannot rely on our old credit reporting; it is based on historical data, which is irrelevant now. Overall, we plan to keep reviewing our portfolio of clients and their debtors more often than we have done before. We will continue to discuss issues and do everything we can to work together and overcome these challenges. Our clients and other small businesses have survived the first wave, and I am concerned that they will not manage to survive a second.
JASKIEWICZ: Internally our plans will be to press forward the way we did in the first lockdown. For our clients, I think we [will] be even more proactive with them and try to address their needs because they will certainly be impacted more than we will be. My most pressing concern is that we collectively won’t take it seriously and we will just have more and more of these mini shutdowns in the future. Hopefully we can all rally together to follow what the medical experts say is the safest way to protect people, while also doing everything in our power to keep the economy moving forward.
SHEPPARD: We are in a business where our customers have very high overheads and fixed costs. [It’s] very hard for them to scale up or down based on big swings in volume. So my concern would be a second wave that could potentially bring us back, from an economic perspective, to April, May conditions and cause the economy to slow again, especially freight volumes for us specifically. I do have a genuine concern that [a] second shock to a lot of our customers may be the one that causes fatal damage to their business.
STANTON: We’re taking into consideration the retailers, wholesalers, businesses that remained open during the first wave, so if this second wave ultimately were to compound, we have a better sense of history. We don’t want to put ourselves in a situation where if there is a retraction, we are overexposed to specific industries or with specific debtors we know had issues in the last shutdown. Two more things I would say that we’re focusing on from a business perspective [are] cash flow and the impact of the UCC filings associated with the Paycheck Protection Program and Economic Injury Disaster loans. How is Tradecap, along with other asset-based lenders, factoring and PO finance companies, going to be able to work around the UCC filings from these programs? We’re hopeful banks and the SBA are willing to be flexible in terms of providing the necessary subordinations allowing businesses to access capital.
TORTORIELLO: We need to keep an open line of communication with our clients. We are an industry where we are dealing with our customers two, three, four times a week. This will allow us to address any issues which may arise for them or us in a timelier manner.
WEINBERG: Florida, we’re worried about a hurricane now. So I’m a little bit more worried about that and the power shutdown if that were to happen for an extended period. We could operate remotely. Technology is clearly a benefit. I don’t think it’s the end of the office as some people have stated. Being face to face and collaborating on thinking is important. Even if we weren’t allowed to go into the office, I think we could operate. Obviously when the power’s out, all bets are off. •
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Commercial Factor is the official magazine of the International Factoring Association. The magazine provides the most relevant content for factoring professionals in the form of news, features, columns and more.
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Daniel F. Tortoriello
North Mill Capital provides asset-based loans and factoring facilities from $50,000 to $30 million.