Why Factoring Isn’t A One-Size-Fits-All Solution

The factoring industry hasn’t always held the most positive reputation among the small business community. Much like the notorious merchant cash advance, a factor can often be known for sky-high rates that lack transparency. Further, critics argue that factoring invoices only puts a band-aid over the larger issue of delayed payments to small suppliers by their large corporate customers with greater leverage.

But cash flows are growing more restrained at a time when supply chain disruptions are common across a wide swath of industries — and accessing capital to cover unpaid invoices can be a valuable lifeline for businesses large and small.

The factoring industry today isn’t what it used to be, says Mike Erwin, who heads account management and partnership management at factoring marketplace platform Factor For You. As the bad actors get weeded out and FinTech innovation drives an improved end-user experience, factoring is working to shift its reputation and promote healthier cash flow for businesses desperately in-need during volatile times.

Industry-Specific Solutions

One of the biggest misconceptions today is that all factoring solution providers are the same. But as Erwin recently told PYMNTS, organizations in various sectors have vastly different needs that not all factoring service providers can fulfill.

“Factoring is a surprisingly broad industry,” he said. “Originally, you may think it’s a one-stop-shop, small ticket type of situation, but that’s not the case. So many different industries have so many different needs.”

The transportation and trucking industry is one arena in which factoring can be particularly valuable — if companies choose the right provider. Not every business needs an industry-specific factoring company, but Erwin also highlighted the differences between large and small businesses when it comes to financing unpaid invoices.

A business with $20,000 a month in revenues, versus a company with millions of dollars a month, “have very similar cash flow needs, but the specifics for each can be very different,” he said.

Addressing Pandemic-Related Pains (And Opportunities)

In the midst of the pandemic, supply chain disruptions and delayed invoice payment practices have opened up the market to greater demand for factoring solutions.

Amid these volatile times, Erwin said a few sectors emerged as key drivers of growth for the factoring industry.

That includes the hospitality sector, which suffered a crippling blow as a result of the coronavirus crisis and depleted travel volumes. The PPE (personal protective equipment) sector similarly saw increased demand as suppliers hiked costs as a result of surging demand.

There were a few surprises, too, when it comes to the types of businesses seeking factoring solutions. Erwin pointed to one client that operated as a source of bicycles for bike shops, with business booming as a result of individuals looking for safe and socially distant-friendly outdoor activities.

“During lockdown, a lot of interesting things have popped up,” he said.

Whether the result of booming business or supply chain disruptions, it’s key for these businesses to be able to have the capital they need to pay their own vendors in order to keep operations flowing.

Rebuilding A Reputation

It’s true that factoring isn’t necessarily the right fit for every business. For instance, Erwin pointed to the many new PPE businesses that surfaced in the booming industry, noting it can be difficult for younger and unfamiliar companies to secure an optimal rate when factoring invoices.

He added that factoring may not be the most appropriate first choice for capital for every company. Rather, it can be a strategic source of funding when the first choice — often traditional banks — pull away, a trend Erwin said he’s seen amid economic uncertainty.

“I’ve seen a lot of banks clamp down on their portfolios. They’ve started pulling credit lines,” he said. “It hasn’t happened as much as I thought it would happen. A lot of banks are trying to work with their clients as much as possible.”

Still, he’s encountered clients who have seen their credit lines pulled from their banks. In these cases, it’s vital for a business to have options when choosing the right factoring service. Corporate customers that are usually bankable but find themselves strapped for cash are often the best candidates for factoring as a method to fill in cash flow gaps until business levels return to normal, noted Erwin.

Organizations must be strategic about when they use factoring, and which factoring providers they use, in order to have the most success. Luckily, today the factoring landscape isn’t the minefield it once was.

“You definitely see more and better factors coming in over the past decade or so,” Erwin said. “I’m happy to see some of the guys who were, early on, operating a level that you wouldn’t really want to be involved in, have dwindled.

“As you get into it more, and work with various factors, you realize who are the people who have the best interest in mind for small businesses — and who are just trying to get as much revenue as they can from a company,” he added.