Saturday, July 18, 2009

The unseen financial side of the journey from farm to fork
Dining Insights, Summer 2009

The fate of CIT Group, the financial firm that supports some one million small and mid-sized businesses and isn't too big to fail, is still hanging in the balance as of this writing. But its misadventures brought to mind the little-known role similar companies, called "factors," play in getting food from the farm to your fork.

Farmers, both corporate and family, have nothing to sell, and no income, until harvest time. They get by on the profits from the last year's crop and loans, typically from banks, using their land and equipment as security. Food processors, the companies that make sausages and corn flakes, have year 'round income from a steady flow of products.

But what about the folks in the middle, the distributors who deliver the products to your kitchen? They sell to you or your food service contractor on credit. At the end of the month, they send a statement and get paid, hopefully within 30 days. But 30 days end-of-month is 60 days from the first delivery. They have to pay cash on delivery for the products they buy to resell to you and, in some cases, even before their supplier will ship to them.

How do they meet their payrolls, pay overhead costs and buy more products in the meantime? Enter the factor.

When your cafe manager signs for a delivery, the invoice is sold to a factor for immediate cash, usually about 80% of face value. When you pay the invoice, the factor pays the balance to the distributor, minus its fee. The later you pay the bill, the less the distributor receives.

The factor, in turn, borrows from banks and other sources to keep up its cash flow, so it can keep sending that 80% to your distributor. (That's where CIT ran into trouble. Its lenders stopped lending.)

Complications arise along the financial chain when more customers pay late, or don't pay at all. The cost is passed back up the chain, ending up in higher prices to you.

So, when you pay the cashier for lunch in the cafe today, you're not only paying for the food and the labor of the farmer, trucker, chef and other folks who brought you the meal, you're also paying for the complex web of financing that lubricates the whole system.