Factoring Innovation Tackles Its Risky Reputation

Though having a choice in financing products is vital for small and medium-sized businesses to manage their cash flow, not all tools are the right fit for every business.

In recent years, the financial services ecosystem has elevated the debate about the role that factoring and supply chain financing programs play in supporting SMBs. Increasingly, critics have argued that such programs can hamper small businesses’ bottom lines, force vendors to accept unfair payment terms and ultimately become an unsustainable and expensive source of funding.

But today, as pandemic-fueled late payments and supply chain disruptions continue to threaten the livelihood of businesses around the globe, factoring and supply chain finance have, in many cases, proven to be a valuable cash flow strategy for B2B buyers and suppliers alike.

Speaking with PYMNTS, eCapital Corporate President Steve McDonald explained that small businesses can indeed find value in such offerings, but emphasized the importance of SMBs doing their research when it comes to assessing all of their financing options.

The Right Fit

One of the biggest criticism of this space, particularly in the supply chain finance arena, is that the corporate buyer will initiate a program and leverage the power in the buyer-supplier relationship. Critics argue that supply chain financing supports corporate buyers’ lengthy payments behavior while imposing expensive discounts on their vendors.

So, how can factoring and supply chain programs ensure that both buyers and suppliers are treated fairly?

“Therein lies the rub,” said McDonald, who noted that much of this friction can be addressed through the participation of a third-party facilitator.

For the service providers themselves, he noted, it’s critical to have a high-touch relationship with companies that are in search of capital in order to best understand their needs and the way their business operates. But it’s just as important for the business itself to fully understand its options.

“A potential client has to study the market and be very careful that who they are going to work with has the right solution for their needs — not only today, but also further down the road,” said McDonald.

A Digitization Push

Factoring and supply chain finance are cash flow strategies that have been in place for decades. But only in recent years has FinTech innovation stepped into the market — to not only mitigate the risk of a power imbalance between the buyer and supplier, but also to add value for end users.

“I do think technology is the biggest difference that we have seen over the last few years, including the way we can take advantage of the information that can be provided to us,” said McDonald. “At the end of the day, you still have to pay attention to things such as due diligence and securitization. Some of the old rules still apply, but there are new tools to help us seize the opportunity.”

He added that technology has enabled third-party platforms and investors to expand the volume of invoices that can be financed — and do so more quickly than before. In the transportation and logistics arena, for example, end users of factoring solutions are able to initiate the financing process while still on the road via mobile devices.

It is innovations like mobile technology and augmented data analytics that can support mitigated risk and accelerated cash flow for end users to drive up the value of initiatives that, when operating under legacy processes, could present an expensive risk to small businesses.

“We’re in the business of cash flow management,” noted McDonald. “All of a sudden, we can start the cash flow process much earlier than historically was the case. Clients can move on to the next business opportunity so much faster.”