Why factoring is not a universal solution

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The factoring industry has not always had the most positive reputation among the small business community. Much like the famous cash advance from traders, a factor can often be known for sky-high rates that lack transparency. Additionally, critics argue that factoring invoices only alleviate the larger problem of late payments to small vendors by their large corporate clients with greater leverage.

But cash flow is increasingly tight at a time when supply chain disruptions are common across a wide range of industries – and access to capital to cover unpaid bills can be a valuable lifeline. for businesses large and small.

Today’s factoring industry is not what it used to be, says Mike Erwin, who leads account management and partnership management on the factoring marketplace platform. Factor for you. As the bad players are eliminated and FinTech innovation improves the end-user experience, factoring strives to change its reputation and promote healthier cash flow for businesses that desperately need it. in times of volatility.

Industry specific solutions

One of the biggest misconceptions today is that not all factoring solution providers are the same. But as Erwin recently told PYMNTS, organizations across various industries have very different needs that not all factoring service providers can meet.

“Factoring is a surprisingly large industry,” he said. “Originally, you might think it was a one-stop, small-ticket situation, but it’s not. So many different industries have so many different needs.

The transportation and trucking industry is one area where factoring can be particularly useful, if companies choose the right supplier. Not all businesses need a factoring company specific to their industry, but Erwin also pointed out the differences between large and small businesses when it comes to financing unpaid invoices.

A company with a turnover of $ 20,000 per month, compared to a company with millions of dollars per month, “has very similar cash flow needs, but the specifics of each can be very different”, a- he declared.

Treat the pains (and opportunities) associated with the pandemic

Amid the pandemic, supply chain disruptions and deferred invoice payment practices have opened the market to greater demand for factoring solutions.

Amid these volatile times, Erwin said a few industries have emerged as key growth engines for the factoring industry.

This includes the hospitality sector, which has suffered a severe blow due to the coronavirus crisis and depleted travel volumes. The PPE (Personal Protective Equipment) industry has also seen an increase in demand as suppliers have increased their costs due to increased demand.

There have also been some surprises when it comes to the types of businesses looking for factoring solutions. Erwin reported on a client who operated as a source of bikes for bicycle shops, with a booming business thanks to individuals seeking safe and socially distant outdoor activities.

“During the lockdown, a lot of interesting things came to light,” he said.

Whether it’s the result of booming business or supply chain disruptions, it’s critical that these companies have the capital they need to pay their own suppliers to keep operations running smoothly.

Rebuild a reputation

It is true that factoring is not necessarily the right solution for every business. For example, Erwin pointed to the many new PPE companies that have emerged in the booming industry, noting that it can be difficult for younger and unfamiliar companies to get an optimal rate when factoring. bills.

He added that factoring may not be the most suitable first choice for every company’s capital. On the contrary, it can be a strategic source of funding when the first choice – often traditional banks – drift away, a trend Erwin said he saw amid economic uncertainty.

“I saw a lot of banks restricting their portfolios. They started pulling lines of credit,” he said. “It didn’t happen as much as I thought. A lot of banks are trying to work as much as possible with their customers.”

Yet he has met clients who have had their lines of credit withdrawn from their banks. In these cases, it is essential for a business to have options when choosing the right factoring service. Corporate clients who are generally bankable but find themselves strapped for cash are often the best candidates for factoring as a method of closing cash flow gaps until business levels return to normal, a noted Erwin.

Organizations need to be strategic about when they use factoring and which factoring providers they use, in order to be most successful. Fortunately, today the factoring landscape is no longer the minefield it once was.

“You definitely see more and better factors coming in over the past decade,” Erwin said. “I’m happy to see that some of the guys who initially were functioning at a level that you wouldn’t really want to be involved in have gone down.

“As you get more into this and work with various factors, you realize who are the people who have the best interest in small business in mind – and who are just trying to get that much. income as possible from a business, ”he said. added.

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