FinTechs See SMB Factoring As Ripe For Disruption

The pandemic has shone a spotlight on the urgent capital needs of small- to medium-sized businesses (SMBs) as they struggle with cash flow.

In an interview with PYMNTS, Brian Reaves, CEO of Amsterdam-based Factris said SMB financing — and particularly the practice of factoring — offers a lifeline for European SMBs.

And the impact has been varied, he said, dependent on the sector. Some sectors, such as travel and hospitality have been devastated; others have not been hit all that hard. Still others are thriving, if they’ve been linked to the digital economy or delivery services. And, of course, there’s everything in between.

“I see receivables and invoices as being a really great asset class,” Reaves told PYMNTS. “When you have a receivable, the receivable is very liquid — and it’s insurable.”

In terms of mechanics across its online platform (Finance Business Automation), Factris buys invoices, and finances and collateralizes invoices the same day they are uploaded, measuring risk through the use of artificial intelligence (AI).

The company, as the owner of the invoice, manages the collection and insurance for a factoring fee paid upfront by the SMB, represented as a discount from the face value on the invoice (the discount starts at 50 basis points, according to Factris).

As Reaves said, “we provide a service in addition to overall liquidity for these smaller to mid-sized businesses.”

In recent news tied to lending extended to the SMBs, the company said earlier this month that it closed a new secured financing agreement for 50 million euros ($58.3 million) with asset manager NN Investment Partners. The facility will be used to purchase trade-related invoices. The facility, according to Factris, features full trade credit insurance.

That announcement, and a recent 5 million euro ($5.8 million) capital raise, also demonstrate, according to Reaves, that there is financing available for alternative financing companies (such as Factris) that can show they manage fraud and credit risk properly.

“We have heard of others that are having their credit lines pulled and are having severe issues with financing their operations,” he told PYMNTS.

The introduction and use of the platform model is helping disrupt factoring as a service, which he noted has been around for a long time. Banks may understand credit and risk, but the issue traditional financial institutions (FIs) have in their relationships with smaller firms is it costs banks more to set up and manage SMB credit lines than they make from those activities. SMBs typically have invoices of relatively smaller size, of say, 2,000 euros or 3,000 euros ($2,333 to $3,500).

Through the platform model (and through Factris’ own efforts), said Reaves, verification of clients and verification/approval of invoices is predicated on what he termed “a bit of automation and a bit of intelligence (which involves the human touch via financial professionals).

“It takes a bit of intelligence to understand what a business is doing, how sustainable it is today, and hopefully how to predict sustainability tomorrow.”

He said that the platform is able to scale into processing tens of thousands of invoices every month for thousands of clients, where the SMBs have roughly 2 million euros to 10 million euros ($2.3 million to $11.7 million) in annual turnover and where the credit lines can reach 1 million euros ($1.2 million).

Asked about the regulatory environment, Reaves noted that in Europe (and other jurisdictions), factoring might be regulated — or unregulated.

“It’s very much a hodgepodge, he said.

In markets where Factris operates, such as the Netherlands and Latvia (the company also has presence in Lithuania), factoring is unregulated. He noted that the company expects to get a license from German authorities to become a regulated financial services firm there. (The company’s centralized funding platform is based in Luxembourg, and each client is onboarded with a separate payment wallet.)

Looking ahead, although the company is focused on the eurozone, he said the company will set up “compartments” for other currencies, such as pounds and dollars as needed.

As the company continues to build out infrastructure, “once we have a critical mass of clients,” Reaves said, “it would then make sense to roll out what I would call a current account — potentially with debit cards — to become a bit more sticky in terms of the overall client relationship.”

As he told PYMNTS: “The fact that we can embed our financing solution into software packages makes it easier and frictionless for people to actually have their invoices financed, insured and collected on their behalf. This will proliferate throughout the ecosystem.”