The future of factoring and frictionless finance

The global pandemic has resulted in unprecedented challenges of economic and social disruption and its far reach has disproportionately affected many sectors, small firms, and disadvantaged workers while accentuating pre-existing challenges for small businesses.

According to FCI data, the total factoring volume in Europe decreased by 6.7 per cent and the cumulative turnover decreased by 6.5 per cent in 2020. It is worthwhile considering that a lack of demand, the intervention of government-backed business support schemes, and some businesses being forced into hibernation has caused significant distortion in the receivables finance market.

Borrowing remained strong in 2020 but was predominantly driven by government & EU schemes, instigated to support economies and avert mass unemployment, yet demand for finance is likely to continue as SMEs (small-to-medium enterprises) recover and these schemes are withdrawn. Many SMEs may return to non-borrowing ways as support grants and schemes fade away, but it is also likely there is an opportunity to support businesses that may have had their first experience of borrowing. There is also a compelling case to be made for businesses that will look to grow and expand rather than survive - particularly as the cost of borrowing remains relatively low in many countries.

Trends and permanent change  

Factoring and receivables finance has gone from strength to strength and has been a significant source of finance that has supported the growth of economies around the globe. Regardless of whether recent headlines concerning Supply Chain Finance may have tarnished the reputation of receivables finance in the short term, it is true to say that the perception of the factoring receivables has often been poor by the business community – overly time-consuming, expensive, and often viewed as a last resort for desperate companies.  

Yes, factors do help businesses which might be struggling but they are also a proven way for businesses to be successful and plan to grow at a faster pace. Factoring has also helped older, medium-sized businesses who prefer greater flexibility over a secure line of credit.

Looking closely at some of these changes we can say these are the amplification and acceleration of existing trends rather than created new ones.

Factoring is flexible, responsive, and grows with a business. The challenge comes in the repositioning of factoring as less of a problem fixer for cash-constrained businesses, but more as an enabler to remove constraints, stimulate growth, and allow businesses to seize opportunities to develop and prosper.

As we continue to grapple with a crisis that has revealed and intensified existing vulnerabilities, we have yet to realise the full impact of the pandemic. We have experienced major shifts in social attitudes, policy, work, and consumption, what these mean for businesses has yet to be understood. One thing is for certain, there will be change. While some changes will be short term, there will undoubtedly be some changes that stay - the new normal.

Looking closely at some of these changes we can say these are the amplification and acceleration of existing trends rather than created new ones. Taking this a step further, one could argue the scale and duration of changes will make some of these permanent rather than temporary shifts in behaviour. This is already evidenced by many corporates downsizing office space as homeworking becomes accepted and often encouraged.

Opportunities arise from challenges

Lockdowns have placed significant restrictions on many businesses’ ability to operate, and many have been required to apply creative changes to the way they do business or pivot towards different operational models. For example, many retailers are shutting down physical stores to become completely online “e-tailers.” This is not “new” by any means, but few could argue this has not been accelerated for many businesses due to the pandemic.

The creation of conventional business plans has been challenging for many businesses due to the uncertain nature of the economy and while businesses strive to have a better understanding of the opportunities and threats, they are evolving their business models, services, and products.   

For example, pre-pandemic supply chains were very lean or would run just-in-time operations and with supply chains being interrupted since the pandemic some have moved to shorten supply chains, working with more local providers, or working with multiple suppliers to spread the risk. We have also seen some very unlikely collaborations where two very different businesses have come together to continue trading - the ice rink in Szczecin, Poland, which evolved to become a flower shop to bypass restrictions comes to mind.

Speed and competitiveness will be crucial to meeting the demands in the current environment and digital platforms, and technology will be key to supporting lenders with the agility required to address customer needs at the speed of the market.

There are also likely to be businesses holding higher levels of stock to avoid disruption, should supply chains falter and perhaps this is where receivables finance providers may then look at funding the inventory – perhaps branching into more asset-based lending solutions, using collateral sitting in a warehouse to provide the business with additional working capital. We have also seen instances, notably in France, where businesses are being funded against purchase orders received for their customers, thus supporting the acquisition of materials necessary to fulfil orders and raise invoices. There are many established techniques that can establish the lender’s security, whilst maximising the working capital for businesses.

Naturally, the main priority for lenders is to manage risk, but for those in a position to seize the opportunities in the market this can only be realised by understanding the specific operating picture – and change is likely to be constant. There are three key elements that lenders need to keep in mind to truly capitalise on this opportunity, specifically; capitalising on the shift in mindset and technology, adopting agility, and evolving to collaborate.

Speed and competitiveness will be crucial to meeting the demands in the current environment and digital platforms, and technology will be key to supporting lenders with the agility required to address customer needs at the speed of the market.

Technology, digitalisation, and access to data have prompted transformation in the lending markets in the last few years, but the implications of the pandemic have accelerated digital adoption. Our reliance on technology has been highlighted over this time and efficiency, security, and improved customer experience should be amongst the top priorities for lenders.

Receivables finance is constantly under threat from unwanted regulation. These regulation changes are not necessarily aimed at the receivable finance market, but they can have the unintended consequences of creating additional layers of complexity, bureaucracy or reducing the lender's security.

Willingness to collaborate with service or technology providers may seem evident but, some partnerships might not be quite as obvious - think of the on-ice florist. Consistent dialogue and engagement with stakeholders will also be crucial, and the importance of having an active local association to work with regulators to help ensure regulation benefits the ability to finance SMEs for the good of the wider economy cannot be undervalued.

Receivables finance is constantly under threat from unwanted regulation. These regulation changes are not necessarily aimed at the receivable finance market, but they can have the unintended consequences of creating additional layers of complexity, bureaucracy or reducing the lender's security. For example, a recent change in UK law placed the government ahead of preferred creditors when a business becomes insolvent - i.e., weakening a factoring company’s claim on the receivables.

Local factoring associations around the world are well placed to lobby regulators to guide legislation and limit the damage to the sector where possible. Governments appreciate the benefit of factoring to provide crucial funding to SMEs and the economic benefit to the broader economy, but they should be mindful not to damage the sector and potentially constrain funding available to SMEs.

The progressive trend we see in many markets is to simplify receivables finance and transform the offering into a secure working capital finance solution for businesses. Open accounting and finance-only service offerings, secured on granular and accurate accounting data, provide a more flexible lending solution to businesses and elevate this solution to rival more traditional lending products.

It is impossible to predict if over-regulation will restrict certain market’s ability to adopt these global trends and ultimately hamper growth, but should this happen, one can imagine a hybrid solution that is the best of both worlds. If lenders can get comfortable with collateralized lending facilities, where the management of the receivables (invoices) are taken care of by the client with near-time supervision and tracking by the lender, this will ensure they are fully secured and able to advance funds with confidence.

Breaking down barriers and embracing the future

What does the future hold? While it has been talked about for many years, at HPD Lendscape we believe the technology, drive, and circumstance have created conditions ripe for lenders to achieve frictionless finance - from onboarding and new business acquisition to in-life operation of receivables finance products. This allows businesses to focus on driving success and growth, supported by working capital funding that is aligned with their needs.

Information technology (IT) providers have been pushing digitalisation for some time, and many financial institutions have acted on this agenda over the last few years, and now there is a greater opportunity to capitalise on this shift in mindset. Cloud services have already laid many foundations, particularly in the support of remote working, and IT is in a prime position to offer the agility to introduce increasingly advanced solutions that will simplify the use of the service and to continuously adapt to the changing demands of the market.

As a technology provider specialising in this financial sector, we have a vested interest in factoring and receivables finance and how related products evolve - particularly asset-based lending (ABL), receivables purchase programmes, and extended payment terms which will continue to play a significant role in offering support to businesses in the future. As a solution to leverage assets more efficiently, ABL solutions will be uniquely placed in some sectors to offer flexibility to lenders in the ever-changing economic landscape and enable businesses to fully unlock their potential.

The wider adoption of data sharing, open accounting, and open banking means that decisions can be made much more quickly by an asset-based lender if they have the trading history of the borrower, with full transparency of sales, purchase ledgers and cash movements at their fingertips.

One can expect new challenges will emerge, but greater collaboration will allow for better practices and applications to be introduced.

Open accounting can provide information vital for the lender to manage risk and optimise the funding available. Checks and assessments are completed in a fraction of the time, and with much less friction than manual processes. Lenders who have access to their clients’ accounting data are in a far stronger position to streamline operations and deliver customer satisfaction, widening the range of sectors supported and using technology to improve the risk/reward paradigm to allow more funding to businesses at an appropriate cost.

The accelerated pace at which organisations are adopting digitalisation and new technologies over the last two years has many realising the increased control, speed, and reliability their supply chain can have, and at a fraction of the cost of their current infrastructure. Lenders and specialist reverse factoring technology providers - like HPD Lendscape - are collaborating more and more to bring additional value in the support of client ecosystems. In this space, we have noted a significant increase in the interest in risk mitigation, specifically through syndication, where larger financial undertakings can be shared with other lenders, thus spreading the risk.

We have seen blockchain technology being applied to reverse factoring services and we expect many more will adopt a similar approach as we enter a post-pandemic era. Blockchain is an ideal solution to ensure reliability and speed, and the immutability of distributed ledger technology deters against double financing and further ensures the authenticity of invoices. But a note of caution here, this technology will only succeed if there is standardisation, interoperability, and widespread adoption of solutions.

Lenders should consider technology which not only offers the sophistication and complexity to meet requirements but are designed for optimal performance for their workforce. More importantly, their technology should also be customer-centric in functionality and design to help businesses streamline their processes and achieve their goals simply.

Whatever the underlying technology, the integration of SMEs into trading networks will not only be a catalyst for a more inclusive and dynamic financial ecosystem where these businesses have access to cost-effective working capital but will also ensure more robust and resilient supply chains in the future. One can expect new challenges will emerge, but greater collaboration will allow for better practices and applications to be introduced.

Artificial intelligence is another technology frequently spoken about, often with fear about the dominance of thinking computers taking over the world. The reality is that AI (Artificial Intelligence) tools such as machine learning will have a role to play in augmenting business processes and enabling humans to have more time to focus on value-creating activities. The receivables finance sector already makes good use of automated decision making and exception detection, and we foresee a logical step to implementing more dynamic algorithms that react and adapt to the vast amount of data that may be gleaned from a variety of sources.

Finally, the demand for lenders to offer fast, dynamic digital journeys for their customers was growing well before the pandemic and digital has become the preferred, if not necessary, channel of choice for many businesses to solve their problems.

We have been focused on building user-friendly, intuitive experiences for our clients and their customers. In a space where two financial products are the same, customer experience will increasingly be the differentiator.

Lenders should consider technology which not only offers the sophistication and complexity to meet requirements but are designed for optimal performance for their workforce. More importantly, their technology should also be customer-centric in functionality and design to help businesses streamline their processes and achieve their goals simply.

Technology to enable frictionless finance

At HPD Lendscape, we were fortunate to start our involvement with receivables finance back in the 1980s when technology was gaining appreciation in the industry as critical to develop growth. Our flagship product, Lendscape, is the culmination of many years of industry experience, continuous investment and a significant user base that is constantly pushing innovation and forward-thinking.

As a specialist technology provider, we have maintained a symbiotic relationship with the receivables finance industry to ensure our technology constantly moves with the times and keeps step with the demands of lenders and borrowers alike. We have deployed our solution, Lendscape, in 50 countries around the world and bring a wealth of experience, based upon different markets, different segments and specialisations.

In a time where many economies are predicted to bounce back to pre-pandemic levels, the business community is looking to seize opportunities. We see our goal as enabling the financial sector to break down barriers and be a catalyst for economic growth, enabling businesses to realise their full potential. 

Article written by:

Kevin Day
CEO, HPD Lendscape

First appeared on: Polish Factoring Association