Why Factors could Snuff out Invoice Auction Vendors

I really like the fact that spot auctions can help small guys access liquidity. We all know small business is always struggling to collect on invoices and in a sense is providing loans in the form of extended payment terms to buyers that have far better and cheaper access to credit.

But these Spot Auctions have their challenges and I have written about this in a number of posts here, here, here, and here

The problem with new entrants such as MarketInvoice and PlatformBlack and others that focus on small business is that when a supplier does spot invoices a few times, or batches of invoices, the client may come back two, three or even more times. But at some point, the client will need a more structured financial facility rather than spot. The cost of funds for facilities are cheaper than accessing spot money from family offices, Hedge Funds, or others that are looking for double digit returns. At that point, you may have serious attrition.

Auction markets generally acquire customers via three methods:

  • Direct sales – telemarketing, direct marketing, etc. = EXPENSIVE
  • Partnership channels – Brokers, Accountants, Banks = generally ineffective
  • Others, such as accountancy software providers = more hype than business

Factors on the other hand have relationships with many companies. They are generally relationship and operationally heavy but information light. Factors may offer many product types -accounts receivable factoring, invoice discounting, purchase order financing, etc.   Those that are preparing for the future know they have to offer new models to compete with Online Merchant Cash Advances, reverse factoring, dynamic discounting, etc.   Several are looking to offer Early-Pay Programs tied to buyers that make a firm date commitment to pay on a block of payables, or they are looking to aggregate all of a company’s invoices to give them a line of credit based on the total amount of invoices you have outstanding

Another opportunity for factors is to build auction capabilities for spot market liquidity for their clients. Factors could develop different types of funding models based on their customer base. Could you imagine plugging in the credit desks of the funds management industry? Factors could develop this product capability and ultimately change their business model. Bibby Financial, CIT, etc. instead of being an investor themselves could find an innovative way to reduce the substantial headcount that is used for their traditional factoring businesses.

There are several technology vendors that focus on providing factors software (HPD, Codix to name two) that could build this into their offerings.

What do others think? Sound crazy? Can factors reinvigorate their product line to compete with spot auction vendors, dynamic discounting, and others?

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Voices (11)

  1. Killian Johnson:

    Going into an agreement with a factoring company, whether it’s spot factoring or not, is simply unreasonable if you’re new to invoice financing. There’s numerous reasons and most of them were listed here – not being able to foresee hidden charges, to predict your business needs. There’s also the fact that different industries benefit differently from factoring services. It’s smarter to find an objective third party such as a factoring broker to provide the experience you lack in finding the right factoring solution. Agreements with factoring companies can be hard to come out of and there’s no keep yourself away from an unbiased expert opinion, even if it’s a one-time selective factoring deal.

  2. Glenn Blackman:

    We did some specific research into the views of SME businesses about selective invoice finance and the use of invoice auction sites. We found that 37% thought a selective approach was best, 63% preferring a whole turnover facility. 39% thought that an auction style approach would be best with 61% preferring a more traditional approach. This suggests that there is a market for all approaches rather than one monopoly. The good news for SMEs is that there are many providers serving all segments of this market.

  3. Peter ACCA:

    In my experience the spot factors have been an excellent partner to my clients to ensure cash positions throughout the year. The traditional invoice finance facility does have a place but unfortunately the level of control they seek, the information they require and the complete inflexibility to understand the businesses needs is why they have the reputation they do.

    As for Carmella, unfortunately she works for the least respected funder in the country! Their affiliation with the plant brothers, their methodology and treatments of clients leave a lot to be desired. – However, there are good and bad at all organisations and i am sure Carmella is lovely!

    Of course a spot factor may be more expensive but to retain control of the business, to pick and choose the lends and to be able to exit the facility, is a price worth paying!

  4. Thomas Andrew:

    Spot factoring or selective invoice finance gives you the flexibility that is essential for a growing businesses needs – you can’t predict the future, you can’t predict growth.

    It would be great if you could but the reality is that growing businesses can’t guarantee what their revenue will be next quarter, how much will be outstanding on their sales ledger, or what payment terms they will be able to negotiate.
    Sure, you take out an office lease, phone contracts etc, but that’s because you know you will need it every single month for the next 18 months. But lengthy agreements for factoring seem very risky and wasteful….

    Can you guarantee that you will need the cash upfront every month for the next 18+ months, getting hit by a long list of ridiculous charges? Or would you be better using companies like MarketInvoice a few times a year – giving you the flexibility to keep your head above the water in the tough months, and empowering you to take control of your cash flow, your credit control and most importantly, continuing growth at your own pace.

    And purely from a cost perspective, if you see the full list of charges that most factoring companies use (almost impossible unless you are already signed up) you can easily see that spot factoring is much more cost effective.

  5. Chris:

    I have to agree with Kamil, the majority of growing businesses do not have the desire to fund all their invoice nor do they need to.
    When you compare the banks like for like with the new alternative finance providers, it becomes quite apparent that although on face value the banks may look cheaper, due to the huge amount of hidden charges they often end up almost double the price.
    Growing businesses often don’t want to be tied up in 18-24 month contracts, what they actually need is a facility that offers them flexibility and transparency.

  6. Chris:

    I have to agree with Kamil, the majority of growing businesses do not have the desire to fund all their invoice nor do they need to.
    When you compare the banks like for like with the new alternative finance providers it becomes quite apparent that although on face value the banks may look cheaper, due to the huge amount of hidden charges they often end up. As a growing business who need

  7. Kamil:

    Many new, transparent providers offer structured facility whenever a company requires one. However, contrary to providers like Bibby, they provide full details of costs up-front and make sure that clients understand what they’re paying for. Even though it’s a structured facility – a business can still opt-out if they need to – no lock-in contracts at all, no high spot finance prices either.

    Looking at various copies of term sheets, Bibby will charge up to 35 different fees on top of what they initially tell their client.

    Here’s an article on how much you may end up paying for this ‘structured facility’: http://blog.marketinvoice.com/2015/05/01/true-cost-of-invoice-finance

  8. Kully Bargota:

    Hi All

    Couldn’t agree more with Carmella. Especially given that if you are looking to enter specialist sectors such as Construction or when looking at a Trade Finance facility (or a combination of both with Invoice Finance and Trade Finance) you do need the backing of your funder who has the experience of dealing in such markets.

    The problem I think that is faced is that the client often feels a longer term contract puts them at a disadavantage because your “tied in”. Given the devestating effects we have seen during the recent recession and the way overdrafts were pulled (sometimes overnight), the longer term option provides security that the funder is also “tied in” to help support the business.

    Spot factors do have a place in the market however should be used for the purposes they are intended.

  9. Carmella Tempier:

    Whilst Spot Factors have their place in the market, they come at a cost and in many situations use this product to eventually take over in the form of a structured facility. This type of Factor will really only have a place where a business has a reasonable debtors ledger who pay within a few weeks but who have 1 or 2 “headache” customers on extended terms.

    Many structured invoice finance providers, such as Bibby Financial Services, now offer short term facilities less than 12 months on monthly rolling contracts.

    If a business is growing and growing quickly, invoice finance is really the only sensible option to fund growth, with long term loans, traditional loans and overdrafts offering rigid lending terms that are repayable on demand. Invoice finance ensures a funding line that grows with the business and ensures the business has sustainable working capital.

    Talk to Me Twitter: @carmellatempier or ctempier@bibbyfinancialservices.

  10. Kamil:

    I have to disagree with your opinion on the ‘new entrants’ in the invoice finance realm.

    The traditional ‘structured financial facility’ providers tend to tie people up to long-term contracts with 18 months length being fairly common. Also, they tend to charge companies with up to 45 different additional fees that they don’t mention until the deal is done. Structured facility will not grow with the business, a flexible, innovative solution always will.

    Readers may find this revealing fact-based article interesting: http://blog.marketinvoice.com/2015/05/01/true-cost-of-invoice-finance

    1. David Gustin:

      Thank you for your reply.

      I agree banks can certainly be slow, cumbersome and also have tight credit policies. But think about what marketplace lenders like Prosper, Dealstruck, Ondeck, etc. can do offering term loans, ABL, inventory lines of credit etc. That is your competition, along with large factors who have a captive audience.

      Yes, the need for spot liquidity is a great thing, especially around quarter end, but at some point, companies would like to have their capital structure fixed for the future.

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