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Interview with Entrepreneurial Factor Allen Frederic, Republic Business Credit
April 1, 2019
By Michele Ocejo
Allen Frederic is a co-founder of Republic Business Credit with over 45 years of commercial banking, asset-based lending, and factoring experience. He previously founded another New Orleans-based factoring company after serving as president of a New Orleans bank. Frederic is currently the president of the American Factoring Association, a past Director and Executive Committee Member of the Commercial Finance Association, past Advisory Director of the International Factoring Association and an instructor for both the SFNet and IFA.
You’ve been in the factoring and ABL industries for over 45 years. How did you get your start in the business?
I got my start in commercial banking. I had worked for a bank during college and graduate school and started my career at the largest Louisiana bank, mainly calling on Fortune 1000 companies. Then I worked for the 20th largest bank in the U.S., a Texas bank. Later I was chief credit officer of a community bank and then CEO of a community bank. It was at that position that I was introduced to factoring because I gave lots of referrals to a factor. I ended up joining that company, which was a public company located in Ft. Worth. It was a true factoring company and I helped install an ABL platform in 1995. Then, in the year 2000, I started a factoring company in partnership with a bank, Gulf Coast Business Credit. In 2010 I founded Republic Business Credit with Stewart Chesters, who is now the CEO.
Factoring has experienced a lot of changes over the course of your career. What would you say are the most significant changes?
First, it’s significantly more competitive. You now have more bank-owned factors and factors that are sponsored by private equity companies. When I started in factoring in the Dallas-Ft. Worth area, for example, you had six or seven factors, today you have more than 30.
Second, you have a great deal of liquidity in the system today. You also have the advent of the MCAs, which take the lower part of the market. They have a significant share. It used to be that the MCAs would play in the $250-500,000 range, but now they’re going up as high as $2 million.
The last change, and perhaps the most significant, is technology. Technology advances help in the operations, processing and underwriting areas.
Would you say increased competition is a good change?
Well, competition is certainly a good thing for the customers. For existing companies in the business more competition means that you have to be innovative, you have to be a leader and you have to formulate evolving strategies for your company to excel in a more competitive environment.
If you could go back and give your 30-year-old self some advice, what would it be?
First would be stick to your credit standards and be consistent no matter what kind of market you’re in. Second, don’t follow the herd, but be a leader and an innovator. Embrace technology. Trust people and empower them to make decisions. I would say that’s the best advice that I could give young people.
Do you have any favorite moments during your career or any special deals that stand out?
I would say my favorite moment was when I sold my equity interest and deposited the check in the bank. Nonetheless, there are many, many favorite moments. Certainly one that stands out was a startup we financed which went on to bring in $100 million in revenue. It’s a satisfying feeling to think that you helped create numerous jobs.
Another highlight was honoring three of our employees in successive years at the 40 Under 40 Awards that the SFNet presented. First was Rob Meyers, who is our president/chief operating officer, then Danika Louis, portfolio manager, and then last year, Candice Hubert, senior vice president, business development officer in our Houston office.
I think it was in 2016 that Republic was awarded fastest growing company in the New Orleans area by the ACG and then this year in Houston the ACG nominated Republic for two awards, the Deal of the Year and the Restructuring Deal of the Year.
Last, I would say what’s been very satisfying is the leadership positions that I’ve been fortunate to have in the Commercial Finance Association, the International Factoring Association and the American Factoring Association. In the SFNet, sitting on the Executive Committee, chairing the Convention Committee, and chairing the Entrepreneurial and Factoring Committee. In the other organizations, as well; I’m president of the AFA and on the advisory board of the IFA. All of these gave me an opportunity to develop strong and lasting relationships with leaders and colleagues in the industry, not to mention the advantage it gives you networking. So that’s been extremely satisfying.
Over the past year, Republic has expanded its presence in Houston and the Upper Midwest. Could you tell us what’s in store for Republic in the coming year?
I think if we look to the future, we’ve got extraordinary young, yet seasoned, leadership with Stewart Chesters and Rob Meyers. The first thing they did was to restructure our balance sheet and bring in some more equity. That positions us to be able to take advantage of a controlled growth strategy that may include new products, new markets or acquisitions. As such, we can nimbly evaluate these options as they become available, determining what really makes sense for Republic in terms of a controlled long-term growth strategy that includes growth, profitability and high credit quality.
What do you think are the biggest challenges and opportunities for factoring right now, especially given the retail industry’s struggles?
In terms of challenges, first would be proposed legislation. There is a new law in California (CA SB1235), which is a disclosure bill. There is one in New Jersey also.
These bills and regulations may have unintended consequences and that is certainly a risk that we see, or definitely a challenge. I know both the SFNet and IFA are working to protect their members’ interests on this front.
Another challenge certainly is competition, especially with bank- owned factors and community banks that have cheaper money and the MCAs. But you also have tremendous opportunities with a consistent strategic planning strategy. And, new technology gives us an opportunity to both cut and manage our cost structure by improving efficiency.
Competition has forced us to be creative in our deal sourcing. For example, when I first started in factoring, 80 percent of our referrals came from banks. Today we’re getting referrals from turnaround managers, boutique investment banks and private equity companies. I mentioned the two ACG awards that we’ve been nominated for in Houston. That was a particularly interesting transaction. It totaled $19 million. We were brought in by Chiron Investment Bank in Houston. The company at the time was being led by a turnaround group, Stout, which had restructured the balance sheet, was dealing with the bank, had cut costs putting the company on the road to profitability and they were dealing with the bank that was going to exit. Republic proposed a $10-million revolving credit. We brought in Utica Equipment Leasing out of Michigan. Chiron brought in Super G as a mezzanine lender. We put together a total $19 million facility which kept the company from having to go into bankruptcy. It has been a success story in that the company has returned to profitability and they’re growing. It was just an overall win-win situation.
But I think what this story illustrates best is that we got this referral from a nontraditional source. Second, we partnered with other folks in the industry that had complementary products, i.e., mezzanine and equipment loans. I expect more of that in the future. I see larger transactions, sort of multi- tranche, where either as a factor you have to have in your arsenal more products or partner with friends in the industry that have those products. I do see that as both an opportunity and a trend.
Does factoring still have a stigma attached to it? Do you still have to overcome the perception that factoring is only for “troubled” companies?
I don’t think there is nearly as much of a stigma as there was at one time. First of all, the potential clients that we’re talking to are much more sophisticated in their understanding of financial products.
I believe that, if presented the correct way, factoring companies can show that they are offering a product that helps companies that are either in a turnaround situation or a growth situation to stabilize, take advantage of opportunities and position themselves for traditional bank financing down the line. Certainly, there was a stigma at one point, but I think today that, with all the financial products available, potential clients really understand the benefit of this product and the fact that it helps position them to take advantage of potential opportunities.
I met representatives of a company last week who told me they had to walk away from a potential $10-million contract because they couldn’t get bank financing. The profit margin associated with the contract was significant. So, for them, taking advantage of factoring when their balance sheet doesn’t allow them to get traditional bank financing, is absolutely the right answer. Moreover, the profits derived from that contract will be retained, and in 12 to 18 months they will be a bankable client.
Are you seeing a different type of client? Do you think this added sophistication is due to the research they can do on the Internet?
Certainly, the Internet is huge. I have customers with minimal business education asking me now about float days. They can enter the word ‘factoring’ on Google and do a little research and they can access most of what they want to know and obtain answers to questions. Potential clients today are much, much more educated about all the financial products, thanks to the internet. TSL