Factoring is a well-worn form of financing in the apparel manufacturing world and most companies accept the high charges as a basic cost of doing business.

Jon Levine, a 25-year veteran in the apparel industry and principal of L.A. consulting firm Apparel Advisors, said every fashion company he has ever advised has used a factor. Most distress calls he gets are from struggling apparel companies that don’t yet use a factor.

“People call me when they’re having problems, and it’s usually because they don’t have a factor in place and they’re trying to collect on their own receivables,” he said. “It can be a mess.”

Apparel companies have long used factors for two main reasons: to borrow money against invoices they need cash to fill, and to guarantee and collect payment for shipped goods.

Downtown L.A. apparel company Evy of California Inc., which designs and imports kids’ clothing and sells it to mass-market retailers such as Macy’s Inc., Target Corp. and Wal-Mart Stores Inc., uses New York factor Rosenthal & Rosenthal Inc.

Evy Chief Executive Kurt Krieser said his company uses a factor primarily to help pay for orders that could run into millions of dollars in advance of receiving payment from big customers.

“The majority of our customers are mass retailers, so, generally speaking, although our payment terms are 60 days, by the time they process everything it can be longer than that,” he said. “We could have a line of credit with a bank, but that would require either substantial equity or substantial collateral, and we’d just rather collateralize our borrowing with our receivables.”

But hiring a factor is more expensive than other forms of financing, particularly for businesses that manufacture products for small retailers. That’s because factors are more concerned with the creditworthiness of the retailers they will ultimately solicit payment from than with that of the borrower.

In the apparel industry, Levine said finance terms in factoring agreements vary depending on the size and dependability of end retailers, but that factors generally allow companies to borrow against up to 80 percent of invoice totals and charge between 1 percent and 3 percent to run credit checks and guarantee payment.

Faster payment

He said the benefits of using a factor outweigh the cost. A factor guarantees payment, which is important in the event a retailer goes bankrupt. In that case, manufacturers who don’t use a factor would have to fight for payment or lose the money. There are also other benefits.

“It’s somewhat advantageous to use a factor because stores tend to pay factors before companies that don’t use factors,” he said.

Those benefits are part of the reason why a growing number of businesses in other industries, such as temp agencies and trucking companies, also look to factoring.

Wilmington trucking company Compass Transportation began working with Orange Commercial Credit, a factor out of Olympia, Wash., about 10 years ago.

Bill McConnell, president of Compass, said factoring gives his company a competitive edge.

“This is a cash-flow business. If a customer approaches me and asks if I can handle an extra $20,000 in work a week, a lot of companies my size would say they can’t,” he said. “The only restriction I have to growing is: Can I get the equipment? Not: Can I fund the receivables?”

Calabasas factor Fast A/R Funding, which tends to factor for small to midsize service providers rather than manufacturers, recently began working with San Diego health care technology consulting firm Ideal Health IT.

John Brimble, president and chief executive of four-year-old Ideal Health, said factoring has been integral to his young company’s early success.

“Our business is in a fast-growth sector and factoring is definitely something that helps us facilitate that,” he said. “Larger, more established companies may be able to use some other financing options, like lines of credit, but that’s not generally the case with smaller, newer, fast-growing firms like us.”

Some companies that use factoring while they’re small might decide once they’ve grown much bigger to manage cash flow with a line of credit from a bank and handle customer credit checks in-house. But Apparel Advisors’ Levine said he thinks setting up that kind of operation is more effort than it’s worth.

“It’s a business decision a company has to make,” he said. “But honestly, I think that if factoring is working, you just negotiate the fees.”

That’s why Evy’s Krieser said he’ll continue to use a factor.

“I find factoring, for us, to be very cost-effective,” he said. “It makes my business easier to run and I can spend more time focusing on what my business is rather than on the financing of the business.”

Staff reporter James Rufus Koren contributed to this article.