[Editor’s note: This is a guest post from Eyal Lifshitz, CEO of BlueVine. BlueVine is a Bronze Sponsor at LendIt USA 2016, which will take place on April 11-12, 2016, in San Francisco. Representatives from BlueVine will be speaking on several different topics at LendIt USA]
Invoice factoring has existed since Babylonian times and, as an industry, represents well over $100B in annual financing volume. Factoring companies generate billions of dollars in annual revenue with losses averaging just 2-4%. Yet in this day and age where mobile phones, computers and the internet rule the world, the way factoring works has barely changed since it first gained wide use in the 1920’s New York garment and textile industry.
Usually, when discussing financial services, government regulation comes up as a major reason why innovation is stagnant. This does not hold true for factoring. As far as financial services go, factoring is relatively unregulated. The main barrier to change is that factoring is complicated when compared to a loan. Since factoring is not a loan but an outright purchase of the receivables, it requires specialized underwriting, infrastructure, and procedures in order to be done smoothly (i.e. avoid catastrophic losses). As the saying in our industry goes – giving money away is easy, getting it back is the challenging part…
Because factoring involves multiple parties (the business and all of its debtors), it requires a lot more underwriting to take place. This requires significantly more work and coordination relative to a bank loan. Besides credit underwriting, there are also unique and creative flavors of fraud—which the factor must know how to avoid—including misdirecting payments, collusion and other creative malfeasances.
The intricacies of the UCC code and potential for so many things to go wrong also make factoring a logistically complex business requiring unique infrastructure like lockboxes and/or controlled accounts.
Factoring also requires unique systems and procedures. With lending, 3rd party loan servicing companies offer turnkey solutions to handle all back office functions at scale, including: customer service and collecting interest, principal and escrow payments from a borrower. With factoring, back-office functions are highly specialized, and non-standardized. Remittance information needs to be updated, invoices must be verified and liens filed. Payments must be matched and rebates issued. Disputes need to be resolved. The operational complexities of factoring seemingly make it a less attractive market for companies looking to scale rapidly.
Yet for all the reasons why factoring has yet to be transformed, small businesses have an overwhelming tide of unmet needs waiting to be solved. In an era where people expect the same ease, speed and convenience in their business services as they get from their mobile apps, factoring companies are not keeping up. What’s more, after decades of long-term contracts, hidden fees, complex terms, and slow service, small business are ready for alternatives that offer transparency, simplicity, speed and flexibility. This is why I founded BlueVine, a customer centric factoring company based on simplicity, transparency and speed.
BlueVine was launched in 2014 and over the last two years we’ve seen phenomenal growth in our product. We’re seeing interest from both companies that are unfamiliar with factoring and excited to see a way to advance their invoices, as well as from companies that have always used factoring and excited to see that BlueVine is bringing factoring into the 21st century. Factoring’s complexities made it the last holdout of traditional business financing, but BlueVine’s growth is proving that factoring customers were eager for the tech revolution to transform invoice factoring, too.
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