Why Not Factoring?
Finance was my undergraduate field and area of emphasis for my MBA studies. Factoring was never mentioned as a finance option during those six years of school. The program designers and instructors were out of touch with the small business world. We were taught lots of theory, but the instructors paid little to no attention to small businesses. Their focus was geared towards Fortune 500 companies instead of the unfortunate five million.
Small business concepts, like factoring, were largely forgotten. Factoring was evaluated in the wrong context and gained the reputation of a last-resort funding option. Factoring was thought to be very expensive, used only by deceitful firms that were disruptive to their clients’ customer relationships. No wonder why nobody wanted to resort to factoring.
Evolution of Factoring
Did you know that factoring is one of the oldest forms of lending and has been important in the development of commerce throughout history? It has been in existence since the 13th century and was crucial in managing trade between the English and American colonies in the 17th century. The colonies used their knowledge to purchase products to sell to colonial buyers without running the risk of non-payment.
Factoring was also integral in the Industrial Revolution. Firms that used factoring developed a deep understanding of the clothing and textile industries. The industries experienced tremendous growth due to the confidence that factoring brought to the buyer-seller relationship.
Factoring became a mainstream form of finance due to the introduction of large independent financial institutions during the 1990s. More and more companies started to use factoring because of the flexibility, speed, and business value that it offered. Both small and large companies grew accustomed to the factoring process and added it into their business strategy, only to huge success.
Even the largest, most sophisticated companies today use factoring. Now it is generally known as “securitization” or “early-pay programs”. Both provide liquidity, balance sheet improvement, and a low cost of funds. Despite the name variations, factoring maintains its core purpose throughout: to sell or assign accounts receivable.
Economic Growth for Middle Market Companies
Although middle market companies cannot get the same terms as the global giants, the economic terms and level of service has improved tremendously. The factoring trend will continue to grow due to continuously improving technology. There will be unprecedented consolidation as firms compete to provide the best value for their clients.
With the vast amount of available information and high level of transparency that borrowers and their advisors have, only the strongest and most reputable firms have a future in the factoring industry. All financial managers, such as controllers and CFOs, will serve themselves and their companies well by familiarizing themselves with factoring and how it can be used to their advantage.
About the Author
Toby Dahm serves as senior vice president and ABL portfolio manager for Hitachi Business Finance. In this role, he assists in business development and is responsible for underwriting and managing all of asset-based loans.
Toby has more than 25 years of experience in commercial lending. He is active in the Association for Commercial Growth, the Commercial Finance Association, and serves as an advisory board member for The Salvation Army.
Contact Toby today at email@example.com or (248) 658-3208.