Susan Matthews was certain she had a winning business idea seven years ago when she invented a horseshoe-shaped support pillow for babies, called a "boppy." With a $25,000 loan from a microlender, the Golden, Colo., entrepreneur set out to build her empire, Camp Kazoo Ltd.
As sales grew, however, Ms. Matthews found that local banks were unable- or unwilling-to help her through the periods when suppliers' bills were due but customers hadn't paid theirs.
Frustrated, she turned in 1991 to National Business Finance Inc., a small Denver-based factoring company, which agreed to buy her receivables for a fee, and help her with credit checks, collections, and accounting.
Today, Camp Kazoo's boppy business is booming. Sales in 1996 registered $2.5 million, and they could double in the next year. Just as significantly for Ms. Matthews, her firm now has a true banking relationship.
Thanks to National Business' recent acquisition by Norwest Corp., Camp Kazoo recently graduated to the Minneapolis-based bank holding company's asset-based lending program. It's still a notch or two below a regular bank loan, Ms. Matthews conceded, but nevertheless a step up the ladder.
"There is no logical lending path for a small business to follow," she explained. Norwest, with its National Business acquisition, "is giving businesses some steps to follow, and I think that's great."
The mix of banking with factoring is not new. Several banks have large factoring subsidiaries that service big manufacturers and wholesalers. But Norwest's October purchase of National Business makes it the only major bank to own a "single-invoice" factoring business focused squarely on start-ups and small firms with credit troubles.
Martin McKinley, president of Norwest Business Credit Inc., said the goal for the new unit is to gain more business relationships for the company as a whole. "The last great frontier for both banks and finance companies is small-business lending," he said. "(Factoring) is a very logical way to penetrate that market."
Single-invoice factors buy receivables from clients that can't obtain regular bank financing, after first conducting a credit checks on the small business' customers. They charge between 1% and 4% of the invoice total for the service, usually with a one month term.
"People say, 'You're charging an awful lot for that money,' " said Robert Borgman, founder and president of National Business Finance. "But we provide a lot more than money. ... We check the credit on every one of those clients and become a company's accounts receivable department."
With total 1996 receivables of $105 million, National Business Finance is a small fish in an industry that registered volumes of $61 billion for the year. And the factoring firm's 1996 earnings of $3 million pale in comparison to the record $1.17 billion reported by its new $80.2 billion- asset parent.
But observers say the acquisition makes sense for Norwest, which already has a strong asset-based lending program in place, and for growth-minded National Business, which hopes business will triple this year as it formally becomes part of Norwest Business Credit.
They are less sure, however, if it signals the beginning of a wave of similar purchases by big banks.
"It's a natural" for Norwest, said Michael Martin, a managing director and head of the financial institutions group at CS First Boston Corp. He pointed out that Norwest's 1995 acquisition of Foothill Group Inc., an asset-based lender in Los Angeles, gave the company crucial in-house knowledge of the industry. Asset-based lending "isn't factoring. But it requires monitoring inventories as collateral for loans, so the same skill sets apply."
Mr. Martin said other banks would probably like to make similar acquisitions, even though factoring is perceived as riskier-and seedier- than traditional business lending.
Mr. Borgman, who will stay on with Norwest, said that factoring can open the door for banks to new customers-and cross-selling opportunities.
But experience has taught him that banks are leery of the business. Since opening in 1987, National Business has contracted out its services to many banks-including First Bank System Inc. and Mercantile Bancorp.-that have wanted to offer factoring to their clients without taking on such a high-service business themselves.
Still, some banks could eventually mimic Norwest. There are about 100 small independent factoring firms like National Business scattered around the country, according to Leonard Machlis, executive director of the Commercial Finance Association.
Those firms, which often purchase only one receivable at a time from their clients, accounted for volumes of roughly $6 billion during 1995, Mr. Machlis said.
In contrast, 20 "traditional" factoring companies, which manage and collect virtually all receivables for clients such as carpet wholesalers, textile makers, and other more-established companies, registered volumes of $55 billion that year.
The four biggest players in traditional factoring, Bank of New York Co., NationsBank Corp., Heller Financial Inc.-a Chicago-based unit of Japan's Fuji Bank Ltd.-and CIT Group Holdings accounted for over $40 billion of the industry's receivables in 1995, according to Mr. Machlis.
Running smaller operations like National Business-which Mr. Machlis called "specialty" factors-requires knowledge and legwork. "It's not risky if you know what you're doing," he said, adding that "smart banks can make it profitable."
