Supply Chain Finance -A Natural Next Step for Factors?

There was an article out in Global Trade Review claiming Approved Payable Finance or Reverse Factoring is a logical next step for Factors. But is it? When you look at Factoring organizations, they provide credit and collection services to Sellers. Switching to marketing and convincing Buyers is a totally new game.

Here are a few reasons why it's not so simple:

  • First and foremost, they must now Negotiate with Treasurers and CFOs from Corporate 2000 organizations.  This is typically not territory they navigate.  In addition, these Corporates are well-served by their many banks.
  • While they can migrate their labor from Collections to on-boarding suppliers, its a new skill set.  The major complexity in on-boarding is the fact that suppliers need to sign the Receivable Purchase Agreement, pay the costs and deal with a variety of legal and accounting issues (such as compliance with accounting requirements under IAS 39, FAS 140), and, most importantly, deal with various restrictions and covenants in lending agreements.
  • In a supplier centric solution, the only financial agreement is with the supplier - so the entity that negotiates the program can actually sign it.  Bank negotiations (such as compliance with covenants, accounting treatment, etc.) are with ONE seller as opposed to many suppliers during the Buyer-led on-boarding process.
  • Many non rated corporations have pledged receivables, preventing them from transactional finance.
  • KYC Compliance - it’s expensive for providers to implement SCF due to regulatory requirements (eg KYC, UCC filings in the US, etc) which makes it difficult to profitably implement bank funded SCF programs for SME buyers)

The fact that many independent or non bank Factoring organizations have worse balance sheets compared to Buyers surely is not lost on the Market either – look at CIT.  Also, many Banks, especially European Banks, run Factoring departments. Banks may be unwilling to touch their factoring business units to potentially cannibalize the business with Approved Payable Programs.

So this is not as easy as the article makes it out to be.

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First Voice

  1. Tony Brown:

    David, congratulations on TradeFinancing Matters!

    You’re right about the shift in marketing/sales focus that factors would need in terms of becoming buyer-centric versus today’s status quo. But that’s not beyond the realm of possibility. Some factors have already embarked on this path and more are likely to follow – especially in the relatively untapped non-investment grade buyer segment.

    To a large extent factors/receivables financiers are both seller- AND buyer-focused. Today, most of their clients are suppliers, but certainly in the case on non-recourse factors (those who take on the buyer insolvency risk for the seller) it would be mistaken to say have little contact with buyers!

    In fact, the relationship between factors and buyers’ senior financial executives is mutually important. It goes way beyond just focusing on “collections”. Factors are vital gatekeepers to the flow of trade credit to buyers, and the latter’s finance teams are key to the provision of financial and market information to the factors. They are mutually reliant.

    It’s therefore by no means a leap to assume that factors and buyers could extend their dialog to reverse factoring – particularly since factors are already so conversant with the needs of SMEs and already professional in handling receivable purchase agreements and due diligence. In fact, one could argue that the factors’ attraction to SMEs on the supply side is one “factor” that would make them attractive to buyers – since the big SCF banks seem to shun small suppliers. Just saying….

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