Stuck in the Stone Age – Factors look to innovate

I recently presented at my first Commercial Finance Association Conference in Miami.  Coming from Vancouver, I was excited to hit 80 degrees and sun.  Little did I suspect that in my only hour to steal some sun, a tornado warning would be issued and no one would be allowed on the beach or pools.  Ouch.

I had three key takeaways from the conference.

  1. First, factoring suffers from a major lender of last resort problem and needs to rebrand itself.  When you are charging suppliers anywhere from 20% to 50% APR for their money, you tend to get stuck with that pawn shop label.  While there was some discussion on inventory in transit and purchase order financing, it seemed business as usual at the conference.
  2. Second, the industry has become very concentrated, particularly in the US. It is now dominated by large factors such as Wells Fargo Commercial, CIT, GE and than a few mid major providers such as Bibby Finance, (who operates in 16 countries), and then a host of smaller players.
  3. Third, risk is highly concentrated in one sector – RETAIL (footwear, apparel, furniture, etc.)  Essentially you have major Big Buy retail that are the obligors to these factoring companies.  Factors must verify invoices with these providers.  They take retail risk they try and offload with receivable puts, credit insurance or even Credit Default Swaps.  Compare that to the supplier network model where the Fortune 2000 have deployed e-invoicing platforms (or eProcurement) and now have validation, routing and approval automated in a high degree of cases.

 

Factoring is a tough business, it's labor intensive, and involves a high degree of risk given the sectors and company names it deals with (Sears, Macys, Kohls, etc.).  We all know the retail sector is changing fast.  My thought is perhaps factors, given the work they have done with sellers and their buyers, may be in a good position to stress test many of the B2B and Supplier Networks who are looking for finance partners.

I think it’s time to move to the Bronze Age!

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