Fintechs have entered many different fields of the financial industry, rethinking and reshaping various parts of banking. One of these parts is the factoring business. While the mechanism of factoring is not very new, the Fintechs’ approach to it is. But why is factoring needed in the first place?
Smaller businesses that are part of any given supply chain often suffer from financial pressure while they are waiting for buyers to pay their bills. Although they get paid with delay, they for instance have to make sure that their own employees and suppliers get their money. Delayed payments in dynamic markets do, by endangering the liquidity, endanger the whole functioning of businesses. Therefore, companies with rather limited equity capital depend on getting buyers’ payments in time.
In order to ease that dependency, factoring was introduced as a service by third parties. Factoring businesses provide an intermediate solution for liquidity problems caused by delayed payments. The idea behind the whole process is that suppliers sell their invoices of a customer or debtor to the factoring business with a discount in order to get their money earlier. Consequently, suppliers do not have to worry about lacking liquidity and interrupted cash flows.
While the concept of factoring is not new at all, Fintechs approach the market in different ways than traditional providers do. They aim to make factoring digital, easy and transparent. One of our ventures, BillFront, provides factoring services for digital media companies, especially targeting ad-tech companies. Working around the long payment terms of advertisers, BillFront’s solution provides media companies and publishers with fast access to their revenues. Without factoring they would normally have to wait between 60 and 90 days for the payment from their demand partners. The respective market is extremely dynamic, which makes timely access to cash vital for companies.
Fintech businesses that offer factoring services often enable freelancers and SMEs to easily avoid financial pressure as a result of delayed payments. One can therefore assume that the popularity of factoring is going to grow in proportion to its simplification. In addition, dynamic and complex markets will require even more financial flexibility in the future, which is why factoring will most likely be an essential part of supply chain networks.