Factoring: here to stay

Factoring is the most future-proof banking product ever. Here’s why.

The history of factoring dates back to the ancient Mesopotamia – with the rules of the trade being carved into the Code of Hammurabi known for its famous “eye for an eye” rule.

So, how has factoring succeeded for so long?

For centuries, factoring has been, and still is to this day, one of the most valid options for businesses. Its benefits are undeniable:

1. Provides steady working capital to be reinvested, e.g. in additional stock
2. Shifts the risk of bad debt (debtor insolvency)
3. Smooths cashflow and financial planning
4. Provides additional information about your trade partners
5. Saves you time spent on chasing the partners with payment deadlines

Still, in the (not so) good old days, factoring wasn’t readily available to everyone. Mostly because factors saw small and medium businesses as a liability: catering to those businesses meant dealing with excessive burdens.

Factors had to collect extensive information about customer risk and creditworthiness – this was not an easy task without internet access. Accustomed to doing business with rich corporates, factors treated smaller players with caution, running countless financial checks on them.

And then the world got online.

With the revolution that online banking services brought to the table in the end of 90s, the factoring business got a completely new start. We saw a rapid growth of factoring transaction volumes – as shown on the graph below. 

(source: FCI.nl)

SMEs that were earlier perceived as third-grade customers turned out to be digital captains, pioneering the use of every available digital channel financial institution would open. The multitude of information obtainable with the new online services allowed for getting to know customers better than ever before.

Shifting operations from the traditional brick-and-mortar branches to online ones was a win-win. Factors benefited not only from a broader customer base that SMEs have brought ot the table, but also from the improved security and cost-efficiency. This was made possible due to:

1. Transaction dispersion – the default risk is spread over dozens of contractors
2. Contractor verification – serves both the factor and the customers. Negative verification done by a factor will send a signal to a customer to be wary of a particular contractor
3. Transaction insurance – with the help of a 3rd party insurance company, the factor and the customer can assign the risk of a transaction to that company
4. Early warning systems – advanced, AI-powered solution that tracks down anomalies and possible frauds, limiting potential losses
5. Automation – with automatic decisions, fewer personnel is needed

On top of that, not only have factors’ conditions improved but the customers themselves have also seen new factoring benefits:

1. A to Z online process  with onboarding, direct digital payments and payouts ensuring quickest access to capital
2. Access to financing chosen invoices from anywhere using your phone or PC
3. Instant decisions on extra cashflow whenever needed
4. More attractive service fees
5. For SMEs -factoring helps to level the playing field between SMEs and the big guns.

Factoring is here to stay and it’s only going to play a bigger role in aiding all companies ranging from entrepreneurs to big corporates to keep their heads above water during this time of economic uncertainty.

Executive Sales Director, Comarch