“The good part, William, is that no matter whether our clients make money or lose money, Duke & Duke get the commissions”
Randolf Duke, Trading Places
Factoring has experienced somewhat of a renaissance in the last decade. Since 2006 annual factoring volume has increased from A$3.4 billion to A$5.3 billion. Growth in factoring volume in Australia was driven to a large extent by three of the major banks scaling back their invoice discounting divisions during the 2008-2010 period, which provided factoring companies with a once in a lifetime opportunity. In our view the traditional factoring model has benefitted from being in the right place at the right time.
Can the factoring industry sustain this growth? We think it can as invoice finance represents 5% of GDP compared to 15% in the UK. However, continued growth will require factoring companies to invest in technology in order to improve risk management and deliver a more flexible and transparent product.
What does the future of factoring look like? We see the factoring model (or the sale of invoices to unlock funding) as evolving to a model where authorized deposit taking institutions (ADIs) increasingly partner with technology platforms, which are imbedded in businesses and supply chains. Already we are seeing ADIs (with their cheap deposits) partnering with online accountants, EDI platforms and ERP systems. These platforms can deploy capital into their user base more efficiently than traditional factoring businesses, which are labor intensive. ERP and EDI platforms can come at a high cost which puts them out of reach for many smaller businesses. However, the online accountants, particularly Xero, have built wonderful ecosystems, which provide SMEs with access affordable accounting solutions and functionality to make invoicing, credit control, and reconciliation more efficient.
Apps automating the different steps in the purchase order-to-payments cycle are increasingly talking to each other which will soon enable small businesses to automate most of their accounts receivable management. As this automation unfolds, the need to outsource the accounts receivable management to a third party is reduced. However, the problem of invoice payment delays still remains. Technology doesn’t change the fact that many supply chains in Australia are characterized by oligopolies at one end and lots of SMEs at the other. No matter how efficient an SME makes its business processes Large Supermarket Ltd is still not going to pay an invoice anytime soon after receiving it. SMEs still need funding.
The automation of these business processes is increasing transparency through the whole purchase order-to-payment cycle and in many cases provides a full audit trail of every invoice. Funders can simply connect to these systems, automate the approval process and fund invoices at a much lower cost than traditional factoring facilities. Does this leave the traditional factoring company as piggy in the middle? Now I’ve heard pigs are smart animals – it is the only way something that fat, slow and tasty could survive the evolutionary process. However we are in the age of machines, and machines don’t replace middle-men: they eliminate them.