SFNet’s March 30th Crucial Conversations webinar, “The Value and Effective Use of Covenants in a Factoring Transaction,” focused on why covenants are needed in a discretionary factoring facility; covenant types and reporting frequency; the art of picking the right covenant(s); the value of compliance certificates; whether covenants imply a lending commitment; the value and importance of a good “market” factoring agreement and more. Here, panelist Hugh Larratt-Smith provides a recap of the webinar.

Moderator: Peter Hughes, sr. vice president, Merchant Financial
Panelists:
Jeanne Siegel, partner, Business Finance,
Thompson Coburn Hahn & Hessen LLP
Hugh Larratt-Smith, managing director, Trimingham
Elena Goynatsky, managing director,
Commercial Services, Webster Bank
Brad Stanza, senior vice president, Wells Fargo

In 1928, the newly constructed The Lefcourt Clothing Center, a massive block-long building on 7th Avenue that housed hundreds of garment companies, was the epicenter of New York’s garment industry that stretched from 13th Street to 42nd Street, with Seventh Avenue – Fashion Avenue – as its spine. It was one of the first fire-proof industrial loft buildings in New York, an attractive feature for garment companies, coming on the heels of The Triangle Shirtwaist Company fire in 1911. One of the central figures in the development of the garment district was Abraham Lefcourt, a dynamo whose rise to riches from poverty is the story of the American garment industry. 

This compact industrial area, less than a mile and a half mile long, housed nearly 7,000 garment shops and employed nearly 200,000 workers. Unlike Chicago’s garment district with its gigantic factories that employed eight to ten thousand workers, the majority of New York’s garment companies employed less than ten workers and only 200 had more than 50 workers. Despite this difference, these Manhattan garment shops comprised the biggest manufacturing industry in the largest industrial city on earth at the time. In 1927, over 50% of the dresses made in America came from the garment district in Manhattan.

The vast majority of these companies were owned by Eastern European immigrants who arrived in America with little money. Factoring was the only financing available to many of these entrepreneurs.

Many got their start in home production in Lower East Side tenements, but by 1910, new state laws prohibited home production. This led to migration to the area around Madison Square at Fifth Avenue. Problems soon arose, however. In 1914, the owners of the large department stores, backed by leading banks of the area, mobilized to force the garment companies away from Fifth Avenue. The fear was that the garment companies’ cut and sew operations would move further up Fifth Avenue to 34th Street, home to Macy’s and Gimbels. The retailers pressured New York City banks to stop financing the construction of buildings for the garment companies. In 1921, the store owners and garment entrepreneurs reached a city-shaping agreement: Seventh Avenue would be the new center of the garment trade. However, one of the lasting legacies of these seven years of acrimony was that many New York City banks became reluctant to finance the garment industry.

Factoring became the jet fuel for a massive number of New York City garment entrepreneurs in The Jazz Age.

Fast forward 100 years.

Factoring has proliferated into many tributaries in the American economy. And factoring has, in many cases, increased in complexity. With complexity comes the need for legal frameworks that have vastly evolved over the decades.

In a recent SFNet Webinar, Peter Hughes from Merchant Financial moderated a panel entitled “The Value and Effective Use of Covenants in a Factoring Transaction”. The following are the highlights from this Webinar. 

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