Should you offer invoice “factoring” to your customers?
When it comes to securing financing for supplies in the B2B space, factoring is a way for companies to purchase the goods and services they need without jeopardizing their ability to meet fixed costs like payroll, rent, and utilities.
Invoice factoring is a financial transaction in which a business sells its “accounts receivable” (customers’ promises to pay) to a “factor” — typically at a discount. Typically, the seller is motivated by a desire to meet short-term cash-flow needs like payroll and rent in the face of long billing cycles or unforeseen delays.
“Without factoring, your business may experience overexposure to the companies you supply, resulting in short-term cash crunches that can result in your business coming up short for its suppliers and vendors,” says Elena Iononko, a leading lending-software innovator and operations chief for TurnKey Lender. “This trickle of late payments can become a flood leading to systemic problems, especially where adverse economic conditions prevail.”
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You can replace the intermediary and take more control
Traditionally, the “factor” in this equation is a third party — names like BlueVine and Charter Capital. The factor purchases the rights to collect the value of receivable assets from the company in need of bridge funding, typically at a discount of between 1.5% to 7%, depending on duration and other variables.
“The factor effectively guarantees the transaction between the buyer and seller,” says Ionenko. “Its compensation is the difference between the discount and the full-value redemption of the underlying assets.” The seller meanwhile is happy to take part in such transactions because it doesn’t want to miss out on sales opportunities because an otherwise robust and busy customer happens to be experiencing cash-flow delays, a fairly common occurrence in some business segments.
Adds Ionnenko: “We think the middleman here — the traditional factor — is no longer required in many circumstances. Advances in technology, decades in the making and accelerating as we speak, mean that any company that takes payments can install and operate a smart, secure, and cost-effective factoring platform with about as much effort as it takes, really, to turn a key.”
Among the top industries for which factoring is popular are:
- Trucking companies
- Freight brokers
- Manufacturers
- Oilfield services
- Technology makers
- Wholesalers
- Staffing agencies
- Clothing retailers
- Office suppliers
- Business services
Most of these industries are subject to seasonality. But here’s a thought. Instead of ignoring a point of friction between your company and its customers, bring factoring services in-house and turn collections into a money-making platform that irons out seasonal bumps and keeps your customers happy.
Read more: Factoring, Invoice Finance, and Other Debt Financing Options as a Business Opportunity
Building capabilities for competitiveness and efficiency
In this configuration, your customers are on a defined repayment schedule, and you earn what amounts to a premium on a certain portion of your sales.
Besides boosting revenue, having in-house factoring opens the door to several competitive strategies focused on building lifetime customer value. A capital-equipment provider with in-house factoring can offer incentives in the form of easier terms (with the promise of even better rates to come for loyal customers) as a means to encourage repeat business. The company could also pro-rate repayments around business dips to cover some of its own exposure.
What stands between your business and effective in-house factoring? In a word, automation. With the most advanced financing software, once you’ve set the criteria, conditions, and caps at which you’ll agree to fund a purchase for repayment in installments, you’re good to go. Without this flexibility, you may have to take on more in terms of staffing and IT commitment than you probably bargained for.
In addition to automation, the software approach to in-house factoring must include the following capabilities and attributes.
- Smart scoring
The success of your factoring program hinges on its ability to shelter your business from risk — the very thing you set out to do by bringing factoring in-house. TurnKey Lender’s origination deploys traditional and alternative scoring to give you heightened visibility of your customer’s financial standing. This determines which customers qualify to exchange invoices for later payment, and helps you set interest rates. A combination of alternative and traditional credit-scoring options make sure no low-risk customers are overlooked.
- Speed
AI powers this advanced credit-scoring and ensures applications are processed in seconds.
- Lower overhead
Invoice factoring reduces the time, money, and man-hours associated with old-school approaches to generating, tracking, and receiving payments.
- Better workflows
Factoring is a complex form of lending. TurnKey Lender provides tailored workflows that cut through complexity and allow factors and borrowers to zero in on the functionality they need.
- White labeling
No company wants another company’s name plastered all over its correspondence, so why would you want a software company’s name on your communications with clients? TurnKey Lender agrees and lets you brand your own financing applications.
- Superior UI & UX
TurnKey Lender’s factoring platform uses only the best design practices, making for short learning curves. The result is intuitive functionality accessible anywhere there’s an internet connection.
- Modularity
TurnKey Lender provides a modular platform so lenders can choose — and only pay for — the functionalities they need. Fron application processing and origination, to underwriting, servicing, collection, and reporting – TurnKey Lender software can do it all.
- Integration
Every segment of the system should be calibrated to work seamlessly with any and all other segments — and the whole system should integrate with third-party applications.
Factoring capabilities are useful alike to equipment suppliers and the companies they serve. But “it takes a lot of effort to sell, buy, and operate this credit product without the right technology and support team,” TurnKey Lender’s Ionenko. “That’s why we’re seeing a lot more interest in our factoring capabilities than ever.”
To learn more on the topic, explore more of our articles about factoring and invoice financing: