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The Secrets to Finding a Line of Credit for Your Business…

Invoice Factoring U.S. and ChinaWhy is it that business I speak with so often say, “…We have been with our bank for so many years, but they won’t make us a loan.” Large traditional banks are designed in most cases for retail banking and corporate lending. There is not much money to be made by making small loans at 5% per year to 1000 small customers. Frankly, the larger banks rather lend one large corporate client $100 million at 3% than a 100 smaller loans. So, how does a smaller commercial bank lender make smaller loans when the larger banks cannot? There are clear reasons why smaller lending institutions can lend to smaller businesses more successfully. Here are some of the secrets to why and how businesses qualify for money.

First a small business owner must rate their business in the A, B or C credit categories in order to know what they qualify for and where to look. This the secret to finding a successful bank lending relationship.

A small business in the A credit category would have a company that is profitable, been in business 2 or more years, has a strong equity position on its balance sheet, and a strong principal guarantee with a credit score of +720. This business would be a good candidate for an SBA loan from $100k to $1 million with sales of approximately $1 to $10 million with not too much difficulty at a smaller, more specialized bank. Traditional loans are typically not available to small businesses even at this level without an SBA guarantee to support their loan.

A small business in the B credit category usually lacks one of the above criteria that an A credit has (as listed above). This places the business in the area of receivable financing (aka invoice factoring) or some other form of collateral based lending (i.e. 2nd TD on business property, inventory financing, etc.). These loans are typically with recourse or limited non-recourse and are highly structured. If your customer base is strong and there is payment records to support trends, then this form of lending can very helpful to growing and graduating to the A credit category.

A small business in the C credit category is missing several items from an A credit criteria and often has other items like tax or lien issues that complicate the lending scenario. A seasoned commercial lender can still place creative financing together. The price will obviously be higher due to the higher risk, but if a small business has cleaned up its act and is on a good sales trajectory with descent margins then seeking this type of lending is a great move to maintain stable working capital and cash flow while the business continues to grow so no sales momentum is lost.

“Providing working capital to businesses that have had a few bumps in the road, but are still growing is challenging for traditional banks. Smaller more aggressive lenders are much better suited to actually lend in this area and they can provide a surprising array of products like receivable financing, inventory financing, invoice factoring, trade financing, PO financing, etc.” states, Stephen Perl, CEO of 1st PMF Bancorp.

By Stephen Perl, CEO

1st PMF Bancorp (USA)

1st PMF Capital (HK)

Author of “Dancing with the Dragon: The Secrets of Doing Business with China” (2012)


Understanding Key Elements in China & Opportunities for Factoring Companies in the New Pilot Economic Zones

Doing business in China takes both business and cultural knowledge.

Doing business in China takes both business and cultural knowledge.

After 14 years of working in China, one gets used to the fire drills that continuously go on with the Chinese government and their many circulars that are issued to the business community. One has to know that, when working with China, one has to be prepared to work in the grey area as nothing is perfectly clear or set in stone (not even for a multi-national as we saw with Google and others in recent years). This comment is not meant to scare off potential factors or investors in the region, as there are many opportunities for factoring companies in China, but to serve as a reality check that “You are not in Kansas anymore Dorothy,” if one chooses to pursue these opportunities.

To illustrate my point, in 2005, I had just set up 1st PMF Bancorp’s license to factor in China as one of the first private factoring companies in the country in a town near Shenzhen where I had a lot of guanxi (the term the Chinese use for relationship). Naturally, I was very excited and still relatively new to China with only a few years under my belt, and with the experience of having setup only one other company at that point in China. So I was very green. My first goal was to stop practicing in theory and to start financing in reality. After about six months, I found my first client, which is a whole other story unto itself (which is best discussed over a few stiff drinks) While I was working on some client requests from our office in Shenzhen, I heard the fax go off. I did not pay any attention until I realized it was news of a new circular that had just been issued by our friends at the Shenzhen Ministry of Commerce (aka MOFCOM) which is the official body regulating non-bank factoring companies (every region has their semi-autonomous offices of MOFCOM that reports to the head office in Beijing) The MOFCOM Circular stated that it was now illegal to take assignment of invoices! Wow, so now I was basically out of business…to say the least, I was beside myself and as any good factor does when they get in trouble, I called my lawyer. After days of talking with my lawyer and friends in the finance industry in China, our office gets another fax. At this point, I am afraid to even look at anything that is coming out of that machine. To my surprise, the MOFCOM altered or basically annulled their circular with another circular, so I was back in business. This was my first big lesson that China was a very fluid business environment, not always moving forward in straight lines. Having lived in China, I’ve found that the Chinese do not move from point A to point B as Americans are accustomed. Their movement towards a goal is best described as circuitous…this is the culture. I speak quite often on China business and I always warn that my business tips and knowledge are almost meaningless in the hands of a person that does not understand the Chinese culture. So I am going to preface the following new opportunities in a half-joking manner by stating: the information you are about to read should only be re-enacted or practiced by a trained professional (with deep resources in China).

With all that said, there are great opportunities happening in the New Pilot Economic Zones in China. Many of us are familiar with the economic miracle of Shenzhen, where the Chinese anointed the mainland area adjacent to Hong Kong with a unique city charter granting almost complete economic freedom (except for free foreign currency exchange) in the early 1980s. From this experiment, we witnessed a business economic empire rise from farmland which, now, even rivals Hong Kong.

The latest economic experiments are in the newly formed financial districts in Shanghai and Shenzhen called Shanghai Pilot Free Trade Zone and Qianhai Development District, respectively (investing in the real-estate in these areas, early on, would have been our best play). These areas are quite small so there is no space for anything extravagant, just branch offices. In fact, the Shanghai New Economic zone is only 29 square meters, located near the Pudong International Airport where much of the land is reclaimed. The Chinese government has set up these zones to meet focused goals of the Chinese economy through small steps. The Chinese government’s goals are to test a freely trading currency in small areas (to limit any potential negative impact on the overall economy) while also promoting businesses in 18 service areas with a primary focus on financial services. The Chinese government’s intent is to focus on these zones to create economic hubs of freely traded RMB (the Chinese currency’s official name in China) to compete with other nearby countries and/or economic hubs. The Chinese government is determined to attract the many multi-nationals, that currently prefer to have their base of Asia operations in Singapore or Hong Kong, to these new Chinese economic zones where they will now enjoy free currency exchange for their RMB and other international currencies.

These new Free Trade Zones present a myriad of future opportunities, but many of their functions have not been clearly defined yet (i.e. how RMB currency is to be traded, in what quantities, by whom, etc.) The details are still developing. Of the main multi-national banks, only Citibank and DBS have set up small offices with licenses for the Shanghai new economic zone, as many of their rivals are most likely waiting for more definite guidelines to be set before fully committing.
So how do these new areas present opportunities for a factoring company? Well, in 2012, the Ministry of Commerce (MOFCOM) approved Tianjin and Shanghai for foreigners to start their own factoring companies or own a portion as a joint venture, so no new opportunities have happened in terms of full licensing. One could license a factoring company prior to 2012, but the guidelines were mostly in the grey area and one would have to have solid relationships with the local government in order to operate successfully. The regional MOFCOMs are really the oversight entities for non-bank factoring companies whereas the China Bank Regulation Commission (aka the CBRC) regulates traditional banking institutions, including those with factoring units.

When starting a factoring company in one of these three new economic zones, post 2012, the amount of paid in capital required for a factoring company is approximately $8 to $10 million USD (based on direct inquiries to MOFCOM by my offices). Most US businessmen are unfamiliar with the “paid in capital” concept practiced in China which requires all new businesses to show the required legal amount to start a business in the bank for 15 or 30 days before an actual license is issued. This requirement is extra strict for financial companies, especially foreign owned financial companies. Today, there has been more than 300 factoring business licenses granted (according to direct inquiries to MOFCOM by my office), but few of these companies are actually operating as a factoring company. One thing a business person working in China learns is that when there is a new opportunity in China, the masses flood to get a piece of the action without even knowing what they are actually getting involved in. The Shanghai New Economic Zone is a perfect example: as of the end of last year, there were over 500 inquiries per day (based on the official report via the China Daily – Nov. 18, 2013) to setup new businesses in the zone. These inquiries mostly revolved around setting up less capital intensive industries; such as travel agencies, HR, information related services, etc. However, the Chinese have always been drawn to quick profits (and are quite adverse, in most cases, to long term investments) so many of the investment rushes in China are driven by the masses acting on news, not well thought out business plans.

So starting a factoring company is easy now, if one has approximately $10 million USD in free capital to let sit in a Chinese bank until the right business opportunities are found in order to deploy the funds. But with the new economic zones, there are possibilities of freely sending the money outside of China when the money is not being used, which makes the proposition of starting a factoring company better than before (seeing that that the money can be used both inside and out of China) Unfortunately, the directives from Beijing as well as the local government in charge of running the new economic zones have not been clearly issued on how the zones will be working. There are only general guidelines and even these have changed. Like everything else in China, this will take time to evolve. But it is all moving forward, just not from point A to point B as we are accustomed.

To make things a little more complicated in taking advantage of these opportunities, there is no secret that China’s commercial laws are still very nascent and their judicial system even more so. Any seasoned factor knows that you need both of these areas of government to be operating efficiently in order to grow safely. Even though a factoring license allows one to work nationwide in China, the governments are still very regional and finding yourself as a corporation from a different province taking legal action against a local company can be hard, and even more difficult if you are a foreign-owned company. “There is however still an important need for the improvement of the general legal environment for assignment and insolvency laws. And most importantly there is a huge need for training and consulting. Today it seems to me that sometimes companies are set up as factoring companies without any knowledge about the basic principles of factoring nor a well prepared business plan in China,” states Erik Timmermans, the Secretary-General for the International Factors Group.

Best practices now are to stick to the major, well developed provinces near the new economic zones when financing a company in China, as the court system and local MOFCOM will be much more mature than many of the other provinces that still have probably 10 years of catching up to do.

“Undoubtedly, there are great opportunities for a serious factoring sector in China, and the SME sector is desperately waiting for new financial services like factoring, but only those commercial factors will succeed who start with the right amount of appropriate expertise,” states Jeroen Kohnstamm, the former Factors Chain International Secretary-General.

Where will factoring go in the next 10 years in China and will there be opportunities? Naturally, factoring will mature in the next 10 years in the format we understand it to be, and of course, there will be many opportunities. But taking time to understand the culture and the terrain in China should be the first steps to successfully understanding China and taking advantage of the opportunities in the region, especially in the new economic zones in the near to mid-term.

Stephen Perl, MBA, MS
CEO of 1st PMF Bancorp
Author: The Secrets of Dancing with the Dragon: Doing Business with China (2012)

Importer Financing & Factoring Opportunities

U.S. importers have been filling the void for many of the products that the U.S. buyers continue to demand with their dollars, and this has presented a niche for new kinds of financing opportunities such as factoring invoices and trade financing.  An interesting side note is that if U.S. buyers just bought $300 more of U.S. products per year, our deficit and manufacturing flight would be solved.

Niche financing for importers has always been around for the large, credit worthy companies in the U.S., but now small businesses can get access to this financing as well.  Letters of Credit have been used by banks for a long time, but a few factoring companies are now becoming experienced at designing trade finance programs for smaller companies, and not just at factoring invoices.

How can a trade finance program help your company grow?  Being able to order larger amounts that the larger US customers are demanding is essential, but cashflow is sometimes restrictive.  Also, sending deposits, without the protection of a letter of credit or a structured purchase, is a dangerous habit as well because there is nothing holding the foreign supplier to making the right quantities, making the delivery dates or other parameters important to your company.

1st PMF Bancorp has been a commercial lender with a specialization in trade finance and factoring invoices for over 30 years.  When you are a small company. having a lender that understands and can be flexible to meet your needs makes all the difference when achieving company’s sale goals.



China-US Trade Alert: Electronic Goods Being Seized by US Customs

U.S.-Customs-seizuresAs we all know, China and US are major trade partners, and there is a large amount of related financing that follows this path of trade. Just last month, US Trade deficit showed a 7% increase in imported goods. Much of these goods are financed by US or Chinese banks or commercial lenders. Many trade finance and factoring companies in the US also provide financing around these services.

Based on several current factoring companies’ reports, it appears that Customs Border Patrol (CBP) is detaining and seizing a much higher percentage of the electronics trade because they have decided to raise their internal requirements for documentation. For example, US Customs requires for tablet computers with Google software to be authorized by Google which makes sense for use of their logos, etc. However, having Google’s approval for use of logos is no longer sufficient documentation for U.S. Customs. They must have a Letter from Google authorizing them to be able to “import” their goods. This appears to be over reaching because if Google gave the approval and certification to the tablet or electronic makers to use their name and logos, then it should be assumed they have the right to import and to sell the same product. Why else would an electronics company seek these approvals and Google’s approval, if it were not for the reason to import and sell these same electronic products.

Invoice factoring and Trade Finance companies financing electronic goods coming out of China, especially with IP on the box or even embedded in the tablet or other electronic devices need to be on high alert to review their respective client(s)’ documentation to make sure that there are no issues upon importation.

If your collateral is detained or seized by US Customs, then what?

Where does one appeal a U.S. Customs decision or go to expedite the correction of an error? The answer, is that one must appeal through the U.S. Customs…there should be an outside judicial remedy to check this government agency, but there is not and most decisions on seized goods take more than 12 months to respond with a decision on an IPR issue. Collateral lenders providing trade finance need to be on alert that U.S. Customs has changed their requirements and more importantly, free reign to make unilateral decisions and change guide lines as described above.

Stephen Perl, CEO

1st PMF Bancorp – invoice factoring worldwide

Author: Secrets of Doing Business with China: Dancing with the Dragon

Is China Trade becoming Less or More Expensive for Your Business?

Businesses working with China trade for importing goods often have to pay for their goods or labor to make many of their completed products for the US market.  Lets face it, the US dollar does not go the same distance it used to in China or anywhere else for that matter.

Unfortunately, the US does not make a lot of toasters or microwaves anymore so retailers and consumers are forced to buy Chinese made goods. US businesses often use trade financing to import goods.  We could buy Made in the USA products, but it is ultimately the consumer’s decision for the most part when they walk into Walmart and choose to buy the less expensive Chinese made product.

Businesses are all in a wait and see mode as the Chinese currency has appreciated drastically over the last several years by more than 30%; however, the Chinese economy looks like it may be finding its equilibrium as the economy matures.  The last couple of years of growth in China’s GDP have shown a dip in their GDP.  Their GDP in the last two years been between 7-8% which are the lowest levels in 15 years. These figures are probably a couple percent too high as well do to adjustments that should be taken internally before China reports. India was also thought to be a industrial machine and it has shown the same decline over the last several years.

The People’s Bank of China (“PBOC”) has also taken measures to slow currency speculation by widening the Yuan currency fluctuation bank to a 2% band.  The PBOC as reported by the Wall Street Journal today stated, “The Central Bank of China is pretty satisfied with the efforts [using this new widened band] to punish speculators”.  “Over the last 5 years, PMF Bancorp’s clients importing and trade financing goods based on factoring invoices from China have seen a dramatic increase in cost of goods and labor in China, but it appears to be leveling off in the last year” states Mr. Stephen Perl, CEO of 1st PMF Bancorp.

Therefore, is China becoming more expensive or less expensive for US importers can be debated but it should be clear now that the currency will probably find an equilibrium around this current level and there should not be anymore large jumps in appreciation.  On the contrary, if the Chinese people, businesses, etc. become worried enough about their economy then we will start to see a flight of capital which would depreciate the currency even further and would help make doing business in China cheaper again.  So, I think all parties have a vested interest in keeping the China Yuan stable at these levels.

Stephen Perl, MS, MBA
CEO of 1st PMF Bancorp


Author of Book: Dancing with the Dragon: the Secrets of Doing Business with China (Book 2012)