Challenging Changes in the Factoring Business

A tough economy, increased competition, and new technology are some of the challenges (and opportunities) being faced in the factoring business.

We recently talked with Jeff Callender, President of Dash Point Financial, to get his insights on significant changes experienced by factoring brokers and companies.  Jeff answered two important questions and you’ll enjoy his straight forward answers!

Is there anything that has changed significantly in factoring invoices over the past 5 years?

Yes, a few things. Overall, the factoring environment has become more challenging.

First, the public has become more aware of factoring and with that, more prospective clients are seeking a factor themselves. That means they’re searching the internet on their own, which in some ways is unfortunate; if they would find and use a good broker they’d save themselves a lot of time and hassle finding a factor who’s the best match for them. They would also steer clear of the factors who aren’t suited to their size or industry.

Second, there are more small factors like me than there used to be, which means my competition is greater. However, as the public’s awareness of factoring continues to increase and more small business owners become aware that factoring can help them (especially after being turned down by banks), that increases the pool of potential clients. In other words, the industry is growing, both in the number of factors as well as the number of prospective clients.

That brings up a third change. I’ve noticed the proportion of less desirable clients seeking factoring is also increasing. I talk to more prospects who just aren’t highly desirable as clients. Many have horrendous credit histories, and they have bought the pitch that their personal credit doesn’t matter to factors. Quite honestly, I squirm whenever I hear or read a factor or broker say that. Why?

While it’s true a bankruptcy or less than perfect credit will disqualify you for a bank loan but not necessarily for factoring, factors do look at a prospect’s background. We would be foolish not to. We’re not necessarily looking for a certain credit score, but we are looking at a person’s character. A bankruptcy five years ago usually won’t disqualify a factoring prospect, but if multiple collection agencies have given up on them, or they have a history of things like DUI’s, not paying child support, more than one landlord suing them, serious or numerous tax liens, and multiple judgments, that says something about their character. It says to me this person is not as responsible as I need a client to be, and others have lost money with them. I don’t want to be next, so I turn down clients with histories like that. And I’m seeing proportionately more such prospects than I did five years ago.

So I implore brokers and other factors: don’t give the pitch that their horrible credit makes no difference. Their histories are viewed a bit differently by factors than banks, but personal character is a huge consideration. As I review a prospect’s history, I always ask myself , “Is this person a quality investment?” Page after page of collection agencies giving up on him or her tells me the answer is no.

Finally, the economy certainly plays a part in all this. It’s also resulting in customers of clients paying more slowly than they used to. While big companies have always paid slowly, they seem to be paying even more slowly now, and other companies who used to pay promptly are also taking longer. Overall, it makes the environment more challenging because you have to really do your initial and ongoing underwriting more thoroughly, and you need to be very organized and systematic with collections. If you’re not, you end up with losses.

Are there any advancements in technology that have made the factoring business easier?

Well, considering the fact when I started, email was a novelty almost no one used – yes, there have been a few advancements in technology! For factors, this includes everything from obtaining credit reports and public records searches online (which used to involve a 1-2 week wait for them to arrive in the mail), to having a website as a requirement for businesses today, to ebooks, to webinars, to online video training.

When I started most factors tracked their accounts on spreadsheets, and now there are several data base programs written specifically for factors. For a long time those were all disk-based, but everyone is moving to the cloud now.

My own software company, FactorFox, provided the first completely web-native platform that others are now catching up to. We’re about to release a new version called FactorFox Cirrus that offers many features the others don’t, and for a far smaller price tag.

About Jeff Callender: Jeff entered the factoring industry in 1194 when he began as a broker consultant. Soon he started his own funding company, Dash Point Financial, and began factoring small receivables.

He has been a frequent speaker at workshops and seminars on factoring, and is the author of numerous books, ebooks, and published articles about factoring. He writes a regular column on the subject of factoring small receivables for the magazine The Commercial Factor.

Want to learn more about the Factoring Business?  Check out the Small Factor Series our best selling digital books written by Jeff Callender!