Pikesville firm grows as factor by knowing clients


January 02, 1995|By David Conn | David Conn,Sun Staff Writer

"Risk surrounds everything worth having," reads the screen saver on John Fox's computer.

It's his own quote, and it seems an apt description of how the 58-year-old financier runs his business, and his life.

Take, for instance, the evening a trio of muggers snatched the purse of Mr. Fox's wife back in 1987. The couple were just returning to their Otterbein townhouse when one of the three young men grabbed the purse and took off.

Mr. Fox -- without a sane thought for his own welfare, he now recalls -- sprinted after the guy, chased him down a dead-end alley and "beat the crap out of him," as he delicately describes it. (The Foxes soon moved out of the city.)

For the most part, the British-born businessman tries to avoid that kind of risk these days. Instead, he's taking his chances with the Pikesville firm he founded in 1991, Reservoir Capital Corp.

Reservoir is in the centuries-old business of factoring: It provides financing for companies by purchasing their accounts receivables at a discount.

Many consider factoring one of the riskiest types of financing. Factors are often painted as the lenders of last resort for companies that can't get in the door of a traditional bank. While it's true that most banks won't touch his clients, Mr. Fox disputes the high-risk charge as the uninformed view of people who don't have the expertise to monitor a client's business properly and evaluate risk.

Reservoir's expertise is borne out by its growth: In a little under four years it has expanded to nine offices from Toronto to Boca Raton, Fla. Its annual volume of purchased receivables likely will reach $200 million in the year ending March 1995, from $41 million in its first full fiscal year in business, which ended March 1993.

For the chances they take, factors are paid well. Mr. Fox acknowledges the annual equivalent interest rate for Reservoir's financing ranges "from the high 20s to the high 40s." He also recognizes that the cost has led some to call factors high-class loan sharks.

"They're fools!" Mr. Fox thunders. "The cost of the funding doesn't matter if it does the job."

The job can be boiled down to this: providing a lifeline for temporarily wounded, or rapidly growing companies by turning their accounts receivables into immediate cash flow, albeit significantly discounted cash flow.

"We are in the intensive-care business, not the hospice business," Mr. Fox says. "You can't come here to die."

Reservoir, unlike some factors, does not act as a collection agency. In fact, its receivables purchases are full recourse, meaning Reservoir's clients are responsible if their customers don't pay the bills.

Of course, trying to collect from a small company whose customers aren't paying their bills can be a formidable challenge. That's why factors, to a much greater degree than traditional lenders, must have the time and expertise to assess and monitor the health of their clients, and their clients' clients.

Banks don't have the time, the culture or the pricing structures to do what factors do, says Michael A. Stevens, senior vice president and risk administrator for American Credit Indemnity Co. of Baltimore, a Dun & Bradstreet Corp. subsidiary that sells insurance for a company's accounts receivable.

"To you and me, the prices might seem exorbitant," Mr. Stevens says. "I think well-run factors will make good profits most years. But poorly run factors will go out of business just as fast as other lenders."

Lately there seem to be more well-run factors. The dollar volume of factoring transactions grew by 20 percent from 1990 to 1993 -- reaching $57.5 billion -- and close to 75 percent in the past decade, according to Bruce H. Jones, a spokesman for the Commercial Finance Association, a trade group for so-called asset-based lenders, including factors.

One reason for the growth is the recent recession, which made bankers more reluctant to lend to marginal businesses. It also led to a wave of corporate shrinkage that continues.

The human fallout in turn has rebounded to create a vast amount of new businesses, many in technical fields that make most bankers uncomfortable.

Reservoir is among the smaller factors that have embraced new technologies, a sharp departure from the industry's roots in financing textile, furniture, carpeting, and other soft goods manufacturers.

"They're really expanding," Mr. Jones says of Reservoir. "And they're innovative, because they'll go into industries that the bigger players won't go into."

That includes clients as disparate as General Kinetics Inc. of Rockville, a maker of secure electronic equipment and cabinetry, and Young Minds Inc., a 5-year-old Redland, Calif., software company that makes CD-ROM computer products.

Mr. Fox's willingness to embrace the unusual stems from a career filled with enough twists and turns to round out three or four average resumes.

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