Invoice factoring isn’t a new financial offering by any means, but the factoring industry has gone through many changes, and is constantly evolving. In this post we are going to better help you understand invoice factoring, and the industry it lives in.
How Is the Factoring Industry Divided?
There are two distinct features of the factoring industry that have to do with the actual companies themselves. At the broadest scale, there are two different types of factoring companies. They are actual lenders, and factoring brokers.
A factoring broker operates much like any other loan broker, mortgage broker, or insurance broker. They are typically experts in maintaining relationships with upwards of hundreds of different lenders. This allows them to streamline the process of choosing a factoring company for their clients.
A factoring broker typically works with clients in all types of industries and backgrounds. They will have a standard application process that can be used for all of their direct lender factoring companies, streamlining the process and cutting down on paperwork and applications.
When a deal is funded, the broker will receive a commission from the lender in the form of a percentage of the factoring fee.
In most cases, the broker also receives a commission on all future receivables that a referred client factors. This potential for ongoing revenue gives the broker to continue to serve their client even after the initial deal is funded.
The broker side of the factoring industry is growing rapidly as it has a lower barrier of entry, as opposed to being a direct lender.
The companies that are actually funded invoices and receivables are typically just known as factoring companies. These are the entities that will take on responsibility for collecting on factored receivables, and are the final point of contact when working with a broker.
To become an factoring company, you need access to at least $1,000,000+ in capital, or generous outside investors. This makes it a difficult business to enter, which leads to many becoming brokers before making the plunge to becoming a direct lender.
Getting an account set up with a factoring company is usually faster than working with a broker, because you are only waiting to hear back from one entity. This makes it a better choice if you are in a crisis, and need funding fast. A factor can fund a receivable in as little as 24 hours in some cases.
Technology and the Industry
Much like every other industry, technology is rapidly changing the factoring industry. New startups offering innovative products and services are appearing all the time. They are threatening the market share of the old established companies who must change their ways to stay competitive.
In response, most brokers and lenders alike are increasing their online presence. Through the use of SEO best practices and Pay Per Click (PPC) marketing, these old lenders are able to enter the digital age. This sudden influx has made it more difficult to compete in the online factoring world.
Factoring has been more prominent in The United Kingdom and Australia, but has been seeing much more widespread adoption in The United States, in recent years. The rapid growth and profit potential are leading many to make their attempt at a piece of the pie.