How the Down Economy Has Positively Affected the Factoring Industry

Down Economy Has Positively Affected the Factoring Industry The current consensus in the factoring industry seems to be that the lower debtor quality is greatly influencing receivables financing. As factors see increases in invoice turnover, the risk of bankruptcy by customers, concentration, and decreases in debtor credit, it may look like troubling times for invoice factoring.

That being said, there are “diamonds in the rough” that can be positively looked upon by factors. As long as the factor holds tight to sound judgment, remains conservative, and uses the core principles of receivable financing, they can take certain advantages that are positively affecting the factoring industry given the current economy.

One large positive outlook for invoice funding is the tightening of the credit market. As the large commercial lenders are recovering losses from bad loans, they are holding potential clients to a very high standard that small businesses will be hard pressed to meet. Thus creating a pipeline for asset-based lending.

Factors and Purchase Order Financing Companies have seen a sharp increase in prospective deals due to the credit crunch. These prospects may not have the collateral for a small business loan to get approved, but a factor can utilize this as a great opportunity. Since invoice financing is based on the debtor’s credit, a small company can receive a factoring facility based on their future prospects and not what they currently have. Thus providing a cash flow solution that works in a down economy.

Commercial Banks also may be dealing with their own liquidity issues. This causes them to seek exit strategies with their current small business clients. These clients can create another good market for invoice factoring. Startup companies, small ticket firms, and small drop shipping companies make good prospects for receivable financing.

For a patient factor, with management properly equipped to “weather through the hard times”, these factors will see that a setback for a few months can often lead to benefits when the economy begins its recovery. The economic downturn affects large companies and small companies alike. Small businesses will see that even their better debtors will be taking extra days to pay.

Invoice financing will help these companies get through the storm. By working with a factor, even though a businesses customer will be taking longer to pay, by factoring their receivables the company will still have the cash flow for their working capital needs. This will also lead to intangible benefits because the client will appreciate the factor working with them. These benefits include good customer references and client referrals.

In the wake of any economic recovery, even the factoring industry itself is getting more notoriety then it has historically. Not only are the small businesses migrating to invoice financing and asset-based lending, but middle-market companies are also looking into this forum. As stronger and more sizable companies look to factoring, invoice financing has become more mainstream as a form of a cash flow solution.

With the higher demand for asset-based lending and receivables financing, there has been a shift to a lender’s market. The increase in businesses looking for alternative ways to finance their company has created an undersupply of asset-based lenders. This is coupled with the fact that, under the increased stress of the economy, some middle market asset based financing companies have dissolved. Factors are now finding that they have more bargaining power when structuring their factoring agreements. Rates and factoring fees are not as negotiable for factoring prospects as they were in the past.

On the riskier side of invoice factoring and asset-based lending, there is also an increase in debtor in possession (DIP) financing. After a company files for re-organization, many banks start pulling the plug and hoping their collateral still hold value. With small businesses hoping to stay afloat after filing bankruptcy, they have less time to restructure. This is because their lenders are eager to recover their money.

Invoice factoring can give these companies the cash needed to meet the day to day operations. The same is true for their suppliers as well. By factoring receivables of the large company’s suppliers, factors also help the large companies because they have increased credit terms. Of course, the increased risk to the factor also translates to higher margins. The factor can hedge their risk with higher factoring fees and lower advance rates.

As mentioned, these benefits only work if the factor holds tight on the core competencies and values of the industries. Factors and asset-based lenders are obviously dealing in a riskier environment, so they must put their prospects under increased scrutiny. Increased monitoring, increased collateral, lower advance rates, and higher fees. These are just a few ways for invoice factoring companies to cover the risk. If utilized efficiently, the factor can reap the benefits of invoice financing in a down economy.

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