Not all Factors are Pawn Shops

I’ve taken some heat indirectly from the factoring community regarding some recent blogs.  First I thank my parents I was born with thick skin.  Second, lets examine the root of their concern.  Most of the large Factors are not pawn shops.  Their business model is different than other pure funding providers in that they provide valuable services, particularly around receivables monitoring and receivables collection that a company may choose to outsource.  In addition, they can provide buyer coverage if necessary.  There is a commission fee to pay for those services, and companies can evaluate the fee relative to their own internal costs.

Where the pawn shop or negative label comes into play is the price of money.  And if you look at the main factors, the cost of their funds has dropped since the financial crisis.  As a funding provider, you are only as good as your balance sheet.  And there has been some drastic improvements here  -see Factors and their Funding Costs – Part II.  This enables the larger Factors to offer rates to their market at or slightly above prime.

I do think Factors need to rethink their business model with the rapid adoption of B2B Commerce and Supplier Networks.  These networks are changing the Purchase to Pay and Order to Cash landscapes and proving to be the next generation of EDI services.  Jason Busch has written a ton on this subject, see Supplier Network Forecast: 2014 Market Growth, Analysis, and Predictions.

Technology can alter a Factor’s cost structure.  Sourcing deals, underwriting deals, monitoring receivables is done with expensive labor.  Technology is a game changer.  Yes, there are issues of fraud, dilution, supplier insolvency, and other concerns to work out.  But these B2Bcommerce and supplier networks are pushing forward and making progress engaging non bank money.  see Nipendo, the new kid on the block offering finance.

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