Fintech has become a major player in the world of finance, and there is no doubt that it is a disruptor to traditional financing options. However, is it really innovating in the financial industry or just repackaging financial services that have always been around? While a lot of Fintech companies are offering new products that can be very beneficial to startups and small businesses, many Fintech companies are taking existing financial services and stripping them down to their bare bones so that they can be automated online. Other Fintech companies may offer identical services to traditional financial institutions, but are willing to take on riskier accounts in exchange for much higher interest rates. It is important to know what you are getting into when you sign up with a Fintech company, while also knowing what other options are available to you. Here on the Factoring 101 Blog we will discuss some of the major players in the world of Fintech and compare their products to what traditonal financial institutions have to offer so that you can make a better informed decision on how to fund your business.
Online lending, often referred to as Fintech, is becoming increasingly popular and is a major disruptor in the world of finance. The reason for this is simple, these online lenders are filling a void for small and medium sized enterprises (SME's) who have always had a hard time qualifying for SBA or traditional bank loans. Even for SME's that do qualify for a loan from the bank, Fintech companies are able to approve loans in as a little as 24 hours whereas banks can take months to make a decision and provide funding. Of course, online lending has its drawbacks, and there are other financing solutions out there that can help SME's improve the cash flow quickly. Let's dive into the world of Fintech to understand how it works and what it entails.
Traditionally bank underwriters would require vast amounts of information in order to approve an SME for a loan. They would analyze sales records, business assets, accounting statements, and pretty much anything else they could get their hands on in order to make a decision. Oftentimes the decision process is slowed down as they request more and more information. At the end of the day, the bank underwriter is only looking at what a business has done in the past, and not looking at what they can do in the future. As a result, even if they do approve an SME for a loan, the amount will only be based on historical numbers and may not be enough to support future growth. Furthermore, since it is only based on past data, startup businesses are pretty much eliminated from receiving funding from a bank.
Online lenders have done away with underwriters reviewing accounts, instead they're underwriters have come up with complex computer algorithms that can measure if an SME qualifies for a loan, and how much they will qualify for. They do this by requesting access to a company's online banking platform and the EDI systems of their largest customers. By providing the Fintech company with login information to these various portals, the algorithms are able to work their magic and come up with an instant decision based on the data collected from these sources. Even startups can qualify as the algorithms would have rules built in for dealing with smaller amounts of data. The algorithms are of course designed to predict future potential growth, giving an SME access to the funds that they would need to grow.
Like all good things in life, there is a catch to online lending. Most of these companies are funded by venture capitalists or crowd sourcing, as a result, the investors are looking for very high returns on their investment. Fintech companies are also taking on more risk as they are allowing computer algorithms to make instant financing decisions, as opposed to a bank that would use a human underwriter to review an application in great detail. The combination of these factors results in much higher interest rates than you would get from alternative financing options. At the low end, Fintech companies may offer APR's around 30% for companies with strong financials, but for startups or struggling businesses, those APR's can be well over 100%.
Furthermore, online lenders require you to authorize them to automatically withdraw funds from your bank account, a practice often associated with predatory lending. Based on the lender this can mean monthly withdrawals, weekly withdrawals, or in some cases even daily withdrawals. Furthermore, since you have provided them with access to your online banking platform, they have the ability to wipe out your account should you in anyway breach their contract.
Another common practice of online lenders is to have steep penalties for early repayment of a loan. Where a bank would allow you to repay a loan early to avoid paying interest, online lenders are expecting you to be paying their exorbitant interest rates for the entire term of your loan. Those that don't have penalties for early repayment tend to charge you all of the interest up front when you take out the loan, so even if you were to pay off the loan early, it won't save you from having to pay interest.
The other big problem with online lending is that it is entirely online. It is very difficult for you to pick up a phone and speak with someone at these large Fintech companies. Even if they do offer customer service, these companies are run by algorithms and it would be impossible for a customer service representative to offer you any actual help.
By allowing computers to do the jobs that had traditionally been done by underwriters, combined with having those very same computers also withdraw funds directly from your checking account, online lenders have eliminated a lot of the expense involved with financing. They have also greatly increased the APR's for financing and have investors with very deep pockets. The combination of all these factors have allowed them to spend more money on marketing their products than traditional financing institutions have been able to do in the past. The result is that while many small business owners aren't familiar with banking alternatives, they are being bombarded with advertising from online lenders and are jumping at the opportunity to receive funding without first checking to see if they have any other options available.
There are alternatives to online lending that don't require you to work with a bank. Two of those alternatives are accounts receivable factoring and purchase order financing. While not every business will qualify for these services, businesses that sell to or provide a service for other businesses (B2B) do qualify. With accounts receivable factoring, businesses are able to turn their receivables into working capital without taking on any debt. Purchase order financing is a way of getting a short-term loan based on a purchase order so that you can pay your suppliers in order to fulfill your purchase orders.
Accounts receivable factoring is a financial tool that allows you to sell your receivables to a factoring company at a discount. As a result, you are not taking on any debt because your factoring company is purchasing your receivables. Furthermore, you aren't just getting funded sooner on your receivables, but you are also outsourcing all of your collection work to your factoring company and, in the case of non-recourse factoring, getting insurance on your receivables. You also aren't taking on debt so there is no lengthy approval process. Instead your factoring company is checking out the credit worthiness of your customers, eliminating the need for you to subscribe to expensive credit agencies, and typically credit decisions can be made within half an hour of submitting a customer for credit approval. The discount for factoring your receivables can vary based on the terms of your receivables, but is very similar to a credit card processing fee.
There are many factoring companies out there, all of who offer slightly different programs and rates. Another big difference between factoring companies is with their ownership. Some factoring companies are family-owned, small businesses just like yours, others are owned and run by major national banks, credit bureaus, gas station chains, or may be subsidiaries of overseas factoring companies. If having a personal relationship with your factoring company is important to you, and it should be, then it is important that you look at who the ownership of the factoring company is.
While there are online lenders that offer "Fintech Factoring", in reality all they are doing is giving you a loan based on your outstanding receivables being used as collateral. They also do not provide you with credit checking or collections services, and it is with recourse, meaning that your receivables are not insured. Plus, they still charge you the same exorbitant APR's as other online lenders.
Purchase order financing is a way of securing the funds necessary to pay your suppliers when you receive a larger than normal purchase order. Purchase order financing can either be used as a stand-alone product or can be combined with factoring to help fund your business. Either way, since purchase order financing is a short-term loan, the fees involved are higher than factoring, but still much lower than fees charged by online lenders.
As a stand-alone product, purchase order financing has a rigid set of rules that can not be broken if you wish to receive funding. Common rules are that it is not available for a work-in-progress, you must have an overseas supplier, and the product must be shipped directly from your supplier in the foreign country to your customer in the US, that is it can't pass through your hands or the hands of any other third party. Typically, the way it works is that your supplier will be issued a letter of credit that they can then take to their bank and draw upon. Because it requires a bank to issue a letter of credit, it tends to be a lengthier process and could require several weeks to secure.
However, if you combine purchase order financing with accounts receivable factoring, it is a very different story since you have built a relationship with your factoring company through the factoring of your receivables. Because your factoring company will ultimately be repaid when you factor the resulting invoice, there is no need to obtain a letter of credit from a bank. Purchase order financing rules become much more relaxed and funding is often available the same day you ask for it. Purchase order financing is more expensive than accounts receivable factoring, so if you can fund a purchase order through the factoring of other receivables then that is a better way to do it. However, for very large orders, if factoring can not provide you with enough funding, then purchase order financing can be a very useful tool in order to take on large orders and grow your business.
Only you know what is right for your business, but just like any other important decision, it is important that you research your financing options before signing up with a company. While it may seem easy to click on an ad on a web page and get instant approval to a loan or line of credit, there is usually a reason why it is so easy and why they have enough money to bombard you with advertisements all the time. When it comes to financing your business, make sure you research all the options out there. After all, you want a financing company that will be working for you, otherwise you will wind up working for your financing company.
DSA Factors is a small, family-owned and family-run business. We have been providing accounts receivable factoring and purchase order financing for over 30 years to wide range of industries. We offer very competitive rates and the personalized service you would expect from a family-owned business. Give us a call at 773-248-9000 and one of our principals will be more than happy to speak with you about how we can help you grow your business.
With each passing day it seems like a new technology is disrupting a traditional business model. Certainly an industry that has been around as long as factoring is not immune to disruption from innovation, and currently supply chain finance is one of these disruptors. However, it is important to understand the differences between factoring and supply chain financing so that you may determine which is right for your business. While they both offer access to improved cash flow, beyond that they don't really have all that much in common.
Perhaps the biggest difference between accounts receivable factoring and supply chain finance is who decides to use the service. With factoring, the decision rests entirely with the supplier. The buyer has no say in whether or not an invoice is factored. With supply chain finance it is the buyer's decision when and if to offer quicker payment on an invoice, and it is up to the supplier to accept that offer. As a result, a supplier can not rely on supply chain finance to fund their business since it may or may not be offered to them. If a supplier needs immediate access to working capital so that they can run or grow their business, factoring is the best way to guarantee that they always have access to the working capital they need.
The next major difference is which buyers you can get immediate funding on. In general, factoring companies will work with all of your buyers, regardless of how large or small they are. However, supply chain finance is typically only offered by major retailers as they are the ones who do enough volume to make supply chain financing affordable. Besides, typically smaller retailers are not cash rich and can't afford to make early payments. To further complicate matters, each one of your buyers who does offer supply chain finance may do so with a different company, meaning you need to manage your accounts across multiple financing platforms, whereas with factoring you only ever work with a single factoring company so it is a much more streamlined process.
Of course the fee is also a major difference. With factoring, the fee is part of the agreement that you have with your factoring company, it does not change. With supply chain finance, the fee is not fixed, you need to make an offer to your buyer and your buyer needs to accept it. If your buyer is cash rich than they may take a lower offer and supply chain finance could be cheaper than factoring. However, for a buyer who is not cash rich or is struggling, they may only be accepting higher offers and factoring could be the cheaper option.
Another issue is timing, many buyers who offer supply chain finance may wait 7-10 days to do so as they need to check your products into their system and make sure nothing is damaged before they can approve it for payment. Then they need to ask you to make an offer. If your offer isn't acceptable then you typically need to wait until the following day before you can make a counter-offer. With supply chain finance it may take two weeks or longer before you receive funding. However, factoring companies offer you funding the same day that you ship and invoice your customer.
Finally, credit insurance may be the most important difference. Of course, you might say that you don't need credit insurance if you are getting early payment with supply chain finance, because after all, you are getting paid. However, it isn't quite that simple. First of all, there is no guarantee that supply chain finance will be available from one of your buyers, even if they did offer it to you in the past, there is no guarantee it will be offered in the future.
The other issue has to deal with US bankruptcy law. When a company files for bankruptcy, the bankruptcy court may require you to return any payments you received within 90 days prior to the filing. The reason being is they don't want creditors receiving preferential treatment, all creditors should be treated equal. Of course, you don't need to return these funds if you can prove that you received them in the normal course of business, but if you are offering a buyer a discount to pay you early, then there is nothing normal about the transaction. This recently became a problem when Toys'R'Us filed for bankruptcy. Toys'R'Us partnered with C2FO to offer supply chain finance, and there is no doubt that everyone who received an early payment from Toys'R'Us had to later return those funds to the bankruptcy court.
With non-recourse factoring however, not only does your factoring handle all of the credit checking for you, but they also insure your receivables. So if one of your buyers does file for bankruptcy or goes out of business, you still get to keep the funds that your factoring company gave you. Furthermore, since factoring companies don't request early payment, it is quite possible that they may be able to prove that payment was received in the normal course of business and they too would not be required to return the funds.
While supply chain finance can potentially be cheaper than factoring with stronger retailers, it can also be more expensive and does not offer all of the benefits that you receive with factoring. Furthermore, it is only available if your customer wants to offer it to you. In many ways, supply chain finance is just a more expensive way of offering your customers a discount for early payment such as "1% 15 net 30" day terms. On the other hand, factoring is a much safer and more reliable way of funding your business. Factoring can be used with all of your accounts, and has very similar pricing to supply chain finance.
If you could benefit from improved cash flow and would like to give a factoring a try, give DSA Factors a call at 773-248-9000. With over 30 years experience helping companies improve their cash flow, DSA Factors has the money to make your company grow.
Today Bonton began its liquidation sales, by the end of August there will be no more Bergner's, Boston Store, Carson's, Elder-Beerman, Herberger's, or Younkers. It was only last month that Toys'R'Us made the same exact announcement. On top of that, Sears, J.C. Penny, Neiman Marcus, Lord and Taylor, and Macy's have all been closing many locations, and now things are looking very bad for Bed Bath and Beyond. Even Walmart closed 63 Sam's Club locations at the start of the year. Things have gotten so bad that it was barely even news when Nine West filed for bankruptcy last week. So what does this mean for the retail environment?
Certainly things aren't looking too good. Bonton is a major department store that anchors many malls. For smaller retailers in the mall, losing Bonton could mean loosing foot traffic and maybe even permanently closing their stores as well. For other struggling anchors in the mall, it might give them reason to close their store in the struggling mall. In malls that have already lost an anchor, losing a second anchor could be the end for the mall. While we have seen many big box stores in strip malls close, this is the first time that we are seeing a major department store and mall anchor close all its locations. There is a very real possibility of it having a snowball effect with the other struggling department stores.
Of course, as a manufacturer or importer, you not only have to worry about the next bankruptcy filing, but also losing a major customer. In many ways, the latter can be much worse. The proof of this is Mattel and Hasbro. Both their stocks took a major hit when Toys'R'Us filed for bankruptcy, and then another when they announced they would be closing all their stores. In fact, billionaire Isaac Larian, owner of Little Tikes and many other toy companies, tried to purchase Toys'R'Us out of fear of what its closure could do to the toy industry.
Certainly you need to be selling to online retailers like Amazon, however, you can't only focus on online. Amazon might be one of the major reasons why all these stores are closing, in fact they announced on Wednesday that they now have 100 million Prime subscribers. But to focus only on Amazon is also problematic, after all, you don't want to have all of your eggs in one basket or limit where your customers can purchase your product. Plus, many of your customers may want to touch and feel the product before they purchase it, something that isn't (yet) possible with Amazon.
Of course, selling to brick and mortar can be very scary right now. While one option might be the increasingly popular taking a discount to get paid early, doing so won't actually protect you. The bankruptcy laws require you to pay back any money you received within 90 days of a company filing for bankruptcy if it is believed you received preferential treatment. Toys'R'Us was working with C2FO to offer its vendors early payment in exchange for a discount prior to filing for bankruptcy, and you can be sure that anyone who received early payment at a discount, is now returning that payment back to the bankruptcy court. What might have seemed like a smart option at the time, in the end did not offer vendors any protection.
Really the only thing that can protect you is by partnering with someone who is doing the credit checking for you, staying on top of breaking news, and offering you insurance. While credit insurance is available for extremely large, credit-worthy accounts, it typically isn't available for smaller companies or companies that show even the slightest inkling of financial distress. Non-recourse factoring on the other hand provides you with the protection you need on the widest range of customers available.
DSA Factors has been offering non-recourse factoring for over 30 years now. When you partner with DSA Factors, we handle all of the credit checking for you as well as provide you with insurance on the receivables which we approve. As an added benefit, we help improve your cash flow by funding you the same day you ship and invoice your customers. For more information about how factoring can help your business, give us a call at 773-248-9000.
It's been almost ten years since our last financial crisis was caused by banks that were too big to fail. However, Bloomberg is warning that the next collapse will be tied to Silicon Valley rather than Wall Street. Over the last ten years the government has tightened regulations on Wall Street to ensure that we won't find ourselves in the same situation that occurred in 2008. However, there has also been a revolution in the world finance by startup companies incorporating new technologies.
While most people are aware of the new regulations that have been placed on the too-big-to-fail banks. It is now nearly impossible to get a small business loan, and even refinancing a mortgage on your home requires massive amounts of documentation that can take you weeks or months to put together. However, not many people are aware of just how large and diverse Fintech companies have become.
While Fintech has entered the world of factoring, its reach extends well beyond factoring into all other arenas of finance. There are Fintech companies that give out business loans, do crowd funding, give computer generated advice, and there are even virtual currencies such as Bitcoin.
The main issue with these new Fintech companies is that unlike the institutions that existed prior to the crash, these new businesses have no oversight. Not only has the government avoided regulating the industry, but the very idea of Fintech implies that there aren't humans making the credit decisions, instead decisions are made based on complex algorithms that are hosted on internet servers. Without any human input going into financial decisions, it is quite possible that businesses may learn how to manipulate the systems and receive funding that they shouldn't qualify for.
Of course the biggest threat to the industry is hackers, who have been breaking into systems and stealing sensitive information at an incredible rate recently. In fact, it was just announced today that Whole Foods' restaurants had been hacked and credit card information had been stolen. The world of Fintech has already been attacked. In 2014 a security breach put Mt. Gox, the world's largest Bitcoin exchange at the time, out of business and cost Bitcoin owners $3.5 billion in today's dollars. To make matters worse, the security breach apparently happened in 2011 and went unnoticed for three years.
While there is no clear cut solution to the problems presented by Fintech, the fact is, Fintech has had an incredible impact on the world of finance over the last ten years. Furthermore, while many Fintech companies have come and gone, overall as an industry, it doesn't look like Fintech is going to slow down any time soon.
UPDATE: Breaking News
Former Securities Exchange Commission Chairman Arthur Levitt spoke out yesterday at the Economist's Finance Disrupted conference in New York. At the conference he stated, "Fintechs tend to march to their own rules. It's a new industry with lots of failures and lots of spectacular successes. But regulation is often kind of background music, and the prevalence of scandal and mismanagement and aggressiveness is part of the backwash of innovation. Hardly a day goes by where there isn't a recording of some scandal or another"
At the same conference, Scott Sanborn, CEO of Lending Club said "We do need to take responsibility in [Silicon Valley] where there is a mentality of growth at all costs, and if you don't have the right checks in place, the right kind of board in place, and plenty of people with audit and risk experience that are providing the right kind of governance, you can have problems."
You may have noticed Amazon Lending in the news recently. According to Bloomberg, Amazon has given out more than three billion dollars in loans since the inception of the Amazon Lending program in 2011, with one billion of those dollars being lent in the last twelve months. They have reportedly given loans to 20,000 businesses throughout the US, UK, and Japan in amounts ranging from $1000 to $750,000. Their loans supposedly carry a very modest APR between 6% and 14%, which would make them cheaper than most other Fintech lenders out there. But just like with PayPal Working Capital, there is a catch. While the APR may be low, Amazon makes up for this by taking a large sales commission. As a result, Amazon Lending may work for very small businesses, but if you're ready to take the next step in growing your business, accounts receivable factoring may be the better option.
You can not request a loan from Amazon Lending, rather Amazon makes loan offers to sellers on Amazon Marketplace, and those sellers can either accept or ignore the offer. It is unknown what criteria is used to determine when a loan offer is made, how much the loan offer is for, what the term of the loan will be, or what the APR on the loan will be. However, Amazon bases the loan on the seller's sales history on Amazon Marketplace, so you can probably assume that if you don't have large and steady sales figures, you probably won't be offered a loan. Furthermore, if you sell directly to Amazon, then you do not qualify for these loans.
While shoppers who use Amazon will see all the products available from both Amazon and Amazon Marketplace every time they search for something they want, the platforms are very different from a wholesale point of view. If you sell direct to Amazon, it is like selling to any other retailer. They give you a purchase order, you ship the merchandise and invoice them, and when the invoice is due Amazon pays you. However with Amazon Marketplace, it is kind of like selling your product on eBay. Amazon will list your product on their site, and will take a commission for each sale you make. If you would like your product to qualify for Amazon Prime, then you need to ship your product to Amazon warehouses, pay storage fees, and when the product sells, you are charged a shipping fee as well. Basically you are giving Amazon merchandise on consignment, and you may be paying them additional fees as well.
Commissions are based on what type of product you are selling. Commissions can be as low as 6% if you are selling computers, and as high as 45% if you are selling an accessory for an Amazon device, for example a Kindle cover. In general, commissions are typically around 15%. In addition to these commissions, Amazon may charge you either a monthly fee or a transaction fee on each sale. If you let Amazon warehouse your product so it qualifies for Prime, you will be paying storage fees and shipping fees as well. If you ship yourself, then you are responsible for paying for shipping. Additionally, Amazon will also charge you a closing fee for each item sold.
Only you can decide whether or not a loan is correct for you. If you sell your merchandise on Amazon Marketplace and wish to continue doing so for the term of the loan they offer you, then you are already paying their commissions and the loan may carry an attractive APR. The loan gets repaid automatically as you sell more merchandise through the Amazon Marketplace, so as long as sales volume remains steady you won't need to worry about paying off the loan. However, if you would like to start selling directly to Amazon or any other retailers, then this loan probably isn't right for you.
Accounts receivable factoring is another form of alternative lending that works with small businesses. Unlike Amazon Lending, accounts receivable factoring works with companies who sell directly to Amazon or other retailers, both online and brick and mortar. With accounts receivable factoring you get funded for your receivables the same day you invoice your customers. Plus, since your factoring company is purchasing your receivables, you aren't taking on any new debt.
Amazon Marketplace may be a great way to introduce your product to the market, and Amazon Lending might allow you to purchase more product to increase your sales volume. However, if you really want to grow your business and want to take the next step, you will have to start selling direct to Amazon and other retailers. If you are ready to take that next step, then give DSA Factors a call today at 773-248-9000 and find out how we can help you fund your growing business.
It may seem strange that accounts receivable factoring, a form of financing that dates back further than the Silk Road, could fit into the modern world of Fintech, an industry that is less than a decade old. However, like any business that has survived since antiquity, accounts receivable factoring has constantly evolved with changing times and in many ways pioneered the path for the new Fintech industry. While you would be hard pressed to find an a true factoring company that only exists in the online realm, you would be just as hard pressed to find a traditional factoring company that doesn't offer a large variety of online tools.
In the same way that online banking and ATM machines have made it so many Millennials never had to write a check or step inside a bank branch location, accounts receivable factoring can now provide your business with the financing that you need without needing to walk away from your computer. In fact, here at DSA Factors we've been offering online tools to our clients for over a decade now. So in many ways, we were a Fintech company before Fintech even existed. But unlike Fintech, we haven't stripped down our factoring program to only offer the services and benefits that a web page can provide. Plus we are still happy to work with clients who prefer doing things the old fashioned way, via phone, mail, and fax.
For years now, offering online approvals has been a standard service that accounts receivable factoring companies have offered. What this means is that when you get a purchase order, you just login to your factoring company's portal and request an approval. Often times the computer is able to make an actual credit decision on the spot and offer you an instant online approval. Of course, as in any business, there is a limit to what can be completely automated, so in the case where the computer can't approve an order, it gets sent to your factoring company's office for review. When this happens at DSA Factors, we do our best to get back to you with a credit decision within 30 minutes, and will e-mail the credit decision to you.
Most factoring companies will provide their clients with aging statements each week so that they know where their accounts stand. At DSA Factors we take this one step farther. At any time our clients are able to login to our portal and view a real-time aging statement.
Just like how banks and credit card companies allow you to view statements online, at DSA Factors we give our clients to view transmittal sheets from our online portal. And unlike banks or credit cards that may limit you to only one or two years of statements, here at DSA Factors you can go back as far as you want to that very first payment we sent you when you first started factoring.
In addition to aging statements and transmittal sheets, at DSA Factors we offer our clients a variety on online reporting options. This includes being able to pull account statements for any customer. Viewing all open or used approvals. Pulling sales reports that show you how much volume each of your customers gave you over a specified period of time. Plus, if there is a report that you would like to see on the portal, all you need to do is give us a call and we will do our best to create it for you. As a family owned business, we pride ourselves on the quality service we provide our clients with, and that extends to the online services we provide as well.
At DSA Factors we don't just extend online benefits to our clients, but also to their customers. At any time your customers may login into our portal with a login and password we provide at the bottom of every account statement we send them so that they can view a real-time statement and make payments online. After all, don't your customers deserve access to the same online conveniences as you.
If the online services that we offer at DSA Factors doesn't seem like enough, keep in mind that we offer one huge benefit that no Fintech company is able to offer. At any time you are able to pick up a phone, give us a call, and one of our principals will be able to talk to you and help you come up with a solution that works for you. That isn't something that you will get from a large Fintech company, that is something that you can only get from a family owned accounts receivable factoring company. And the value of being able to speak with someone who can actually help you and cares about your business, is much greater than the inconvenience of being limited to only the functions that a web page is able to handle.
If you want to improve your cash flow, outsource you accounts receivable, get credit insurance, and have the convenience of being able to work online, but still want the personalized service that you deserve, give us a call today at 773-248-9000. Or if you want to go "Fintech", feel free to send us an e-mail at firstname.lastname@example.org or chat with us right now on this web page.
Everyone knows that accounts receivable factoring has been around for a while, in fact, if it wasn't for factoring, in fourteen hundred and ninety two, Columbus wouldn't have been able to sail the ocean blue. However, in recent years, in response to rapidly developing technology and an unwillingness by banks to lend money, a large number of fintech companies have emerged offering entrepreneurs a variety of ways to raise money for their businesses. These fintech companies offer everything from crowdfunding to factoring. However, it is important that you compare the services that these new fintech companies provide as well as the fees they charge to more established funding sources.
Crowdfunding is indeed an excellent alternative to venture capital. Companies like Kickstarter and Indiegogo allow start-ups to raise money for their business through pre-sales, rather than receiving loans or giving up a percentage of ownership to venture capitalists. So not only does crowdfunding allow you to maintain ownership of your business without taking on new debt, but it also provides young companies with advertising and the chance to build up a large and enthusiastic customer base. Of course crowdfunding isn't free, you will have to pay a commission on any funding you receive in addition to payment processing fees, but then again venture capital isn't free either. The other big difference between crowdfunding and venture capital is the scale. Typically crowdfunding works on a much smaller scale, giving new start-ups the ability to raise thousands, tens of thousands, and occasionally hundreds of thousands dollars. Venture capital on the other hand isn't always all that interested in such small investments, but could be a good place to start if you are looking for a million dollar deal.
While crowdfunding is a great way of getting your product seen and sold directly to consumers, it does not typically help you with funding large orders from retailers. For this, an excellent alternative to venture capital is purchase order financing, which is a service provided by many traditional accounts receivable factoring companies. With purchase order financing you can obtain a short term loan based on a purchase order, and then you pay back that loan by ultimately selling the invoice associated with that order to your factoring company.
Factoring has always been an excellent alternative to getting a bank loan. However, fintech factoring companies haven't really innovated the factoring industry, but rather offer short-term, high-interest small business loans that improve your cash flow, but don't provide the other services that traditional factoring companies provide you with. Like traditional factoring, the fintech factoring companies are not too concerned with your business's or your personal credit, meaning that companies that do not qualify for a traditional bank loan will qualify for a loan with them. However, coming from their IT backgrounds, the principals of these firms don't have any real experience in the factoring industry, nor do they understand all of the benefits that traditional factoring offers small businesses.
In an interview with ABF Journal, George Bessenyei, director of 48 Factoring, stated "we are not coming from the financial space, we are coming from a technology space. I see us as a technology company that provides finance." In another interview with ABF Journal, Eyal Lifshitz, CEO of BlueVine said "I was looking for a way to disrupt the lending industry. I started learning about factoring. I wanted to modernize it and make it a streamlined process where the borrowers can click a button and get money." While it is true that these new fintech companies have streamlined the process of getting funded so it can be done entirely online, they also stripped-down factoring to its bare bones. Key aspects of factoring such as not taking on any new debt, outsourcing your credit checking and collections, insuring your receivables, and an unlimited potential for funding have been eliminated by the fintech factoring companies.
While fintech factoring may offer a faster, more streamlined approach to getting funded, and its rates mirror traditional accounts receivable factoring rates, they actually will cost you quite a bit more both timewise and financially than traditional factoring. Because fintech companies don't handle your credit checking, you are still responsible for assessing the credit worthiness of your customers and will need to subscribe to expensive credit agencies in order to do so. You are also responsible for handling all the collection work, which as your company grows could eat up much of your time or require you to hire additional employees. Finally, without credit insurance, when a customer is unable to pay an invoice, you are out the money. While you could be very conservative in who you offer payment terms to, doing so will mean that you will be turning down a lot of business that a traditional factoring would most likely be willing to improve. Alternatively, for large orders, you can purchase credit insurance for an additional charge from insurance companies.
It is true that accounts receivable factoring may be old, but that doesn't mean that traditional factoring companies don't innovate. The fact is, traditional factoring companies have been using innovative software and providing online tools to their clients for many years now. Nearly every traditional accounts receivable factoring company allows their customers to submit accounts for credit approval online, and oftentimes can provide their clients with instant approvals directly on the web page. Invoices can also be sent via e-mail to ensure speedy processing. Plus, your factoring company has the ability to pay you via ACH or wire so that funds are electronically deposited into your bank account as opposed to having to wait for a check to arrive in the mail and then take it to a bank. While the process might not be as streamlined as fintech factoring, accounts receivable factoring companies always pride themselves on speedy turnaround and funding you within 24 hours, if not the very same day that you submit your invoices to them.
Another common misconception that fintech factoring companies have about traditional factoring is that accounts receivable factoring companies are all owned by banks and only care about large accounts doing millions a year in sales. While it is true that many factoring companies are owned by banks and prefer not to deal with smaller businesses, this is not true of all factoring companies.
DSA Factors has always been family owned and operated, and we provide factoring to all businesses regardless of how much volume they do. At DSA Factors we have always been innovating ever since we started factoring in 1986 and programmed our very own factoring software using Basic on DOS 3.3 computers. While we have long ago moved on from our original software, we still continue to develop all of our own software and are continuously improving it in order to give our clients more options in how we finance their businesses. Today we offer online instant approvals to our clients along with a number of online reports including real-time aging statements as well as give them the ability to view previously paid transmittal sheets for as long as they have been factoring with us. Additionally we provide your customers with a login where they can view an account statement and make payments online. We even welcome ideas from our clients on how to improve our online portal so that they can get the most out of our factoring services. So if you are looking for financing and want a factoring company that combines technology with knowledge, experience, and service, look no further than DSA Factors. Give us a call today at 773-248-9000 and one of our principals will be more than happy to speak with you.
For most small business owners, obtaining a line of credit from a bank has never been easy. In recent years a number of technology companies have discovered this problem and it has led to the emergence of fintech, a form of online lending. However, what many small business owners don't realize is that there is another alternative to the banks, which is factoring. Factoring companies however offer a whole lot more than the fintech companies, but also have much more experience and knowledge, better customer service, and typically cost less.
Fintech companies provide their customers, who don't qualify for a small business loan from a bank, with short-term, high-interest loans using their receivables as collateral. Because they are using receivables as collateral, companies such as BlueVine claim that they provide accounts receivable factoring, but really they are just providing their customers with a loan. Other companies like Fundbox claim they provide invoice financing, which they differentiate from factoring. While it is true that they do not provide factoring, what they don't realize is that invoice financing and accounts receivable financing mean the same as factoring. This demonstrates a very big difference between fintech and factoring. These fintech companies are really young IT start-ups with little or no experience in the industries that they serve; in fact, they may not even know basic industry terms. Factoring on the other hand has been around for hundreds of years, even Christopher Columbus used factoring. While most factoring companies haven't been around quite that long, they all have quite a bit of experience and a background in the industries that they serve. For example, DSA Factors started off as the consumer finance arm of a retail furniture store under the same ownership. Eventually they decided to start offering factoring services to furniture and bedding wholesalers who they bought from. As the factoring business grew they started expanding out to other industries such as giftware, housewares, apparel, and trucking. Now, having factored for over 30 years, they are still helping small and medium sized businesses grow.
While the goal of both fintech and factoring is to help you improve your cash flow, perhaps the biggest difference between fintech and factoring is how they accomplish this. A fintech company provides you with a loan, meaning you are taking on debt. Furthermore, the loan has a very short term and if you offer extended terms, such as net 90 days, to your customers, it is quite possible that the loan will become due before you receive payment on the invoice that was used as collateral. With factoring, the factoring company is purchasing your accounts receivable, or invoices. The funds you receive from a factoring company are yours to keep and spend however you like. Even if one of your customers pays late, you don't need to worry about paying back the funds you received.
Of course services provided are another really big difference between fintech and factoring. Fintech companies seem to pride themselves on how they will never contact your customers; they seem to think that you will appreciate this. However, all that this means is that if your customers don't pay them, they will come after you. With fintech you still need to stay on top of your accounts receivable and send out statements and make collection calls. For a small business this means that the owner typically needs to spend a lot of time just trying to get paid by their customers. For medium sized businesses you will probably need to hire another employee just to manage your accounts receivable, meaning additional payroll. With factoring you are outsourcing your accounts receivable. Factoring companies have already invested heavily in the software necessary to manage A/R, and are able to do so because they manage A/R for many clients. They have professional and courteous collectors who are able to make the phone calls for you. Plus, because your customers may purchase from several other vendors who factor their receivables, a factoring company has a lot more leverage in collecting from a customer who may not be willing to pay. The fintech companies try to scare you by saying that factoring companies can ruin your relationship with your customers, but this couldn't be further from the truth. Factoring companies are not collection agencies, they understand the importance of the relationship you have with your customers, after all, they have a similar relationship with you. As a result, your factoring company provides your customers with gentle reminders that payment is due, and always treats your customers with the respect they deserve.
Another big difference between fintech and factoring is the insurance they provide. With Fintech you receive no insurance on the invoices you put up as collateral, if the invoices don't get paid, you still have to pay back the fintech company. However, many factoring companies, such as DSA Factors, provide non-recourse factoring, meaning that you are insured in the situation where one of your customers is unable to pay due to financial problems. Furthermore, since your factoring company is insuring your receivables, they also handle all of your credit checking for you, meaning that you don't need to subscribe to expensive services such as Dun & Bradstreet. While it is possible to purchase credit insurance separately, it of course comes with additional fees, and typically only covers large orders for very creditworthy companies such as Amazon or Walmart. If your customers are mom and pop stores, or your invoices are smaller than five or six figures, credit insurance is not something that is readily available to you.
Of course, for many small companies simply getting funded for your invoices isn't enough. For a company that has just received their first six figure purchase order, it may be very difficult to put that order together. To make matters worse, if you are unable to accept such a large order, it is unlikely that the company placing the order will come back to you in the future. If you manufacture in China you typically need to put 30% down to start production and then a month later when production is complete, pay the remaining 70% to get the merchandise put onto the boat. It will be another month before the container arrives in the US and you are able to ship and invoice your customers, and a fintech company will not provide you with a loan until you do so. For service companies you may need to hire additional labor and will need to meet payroll long before you complete the job and invoice your customer. If use fintech for your financing they won't lend you the capital in advance, and you won't be allowed to take out a loan with a bank. However, many factoring companies, such as DSA Factors, will provide their clients with purchase order financing, which is a short term loan based on the PO so that you can fulfill a large order.
Finally there is one more major difference between fintech and factoring companies, and that is customer service. Fintech companies are all about technology; they integrate with business software such as QuickBooks, and believe that customer service is about giving their customers fancy online tools. Of course this means that you too need to use QuickBooks or whatever other software they may integrate with. Factoring companies on the other hand realize that a big part of doing business is developing a relationship with the people they work with. Perhaps factoring companies don't offer all the fancy technology and software integrations as the fintech companies do, but they aren't dinosaurs. Nearly every factoring company has an online portal where their clients can login, request approvals, and view a variety of reports. While there are some large bank-owned factoring companies, there are also plenty of family-owned factoring companies such as DSA Factors. At DSA Factors you can always call and speak with a principal, no need to deal with account managers or low-level employees who can only answer simple questions. As a result, factoring companies are able to work with you creatively and aren't restricted to just the 1's and 0's of the digital fintech world.
When it comes to financing your small business it is important that you look at the big picture. While fintech may be new and exciting, you get a whole lot more with factoring. Plus, with factoring you most likely will save money as well!
If you would like to give factoring a try, call DSA Factors at 773-248-9000 and either Ben, Max, or Howard will be available and able to help you. There is no obligation or long-term commitment, and you can start receiving funds in as little as 24 hours. Start growing your business today with a time-tested and proven method that works, accounts receivable factoring.
There has been a lot of talk in the news about fintech (financial technology) lately. Certainly there is a lot to be said about alternative approaches to financing over more traditional methods offered by the banks. However, accounts receivable factoring has always been an alternative financing method over what the banks offer, and has a long track record of success. In fact, many of the fintech companies even offer factoring programs, but they tend to be bare bones versions of factoring that only offer some of the benefits gained by factoring, and oftentimes even charge higher rates than traditional factoring companies.
The factoring industry has been around for a long time. It was well established in Europe when the original colonists brought it over to America. In fact, the king and queen of Spain offered a form of factoring to Christopher Columbus when he wanted to set sail for the "New World". While this may seem antiquated in our modern technology driven world, the fact is that most factoring companies do take advantage of modern technologies, offering most of the benefits of fintech, but with much more experience, a proven track record of helping to grow small to medium sized businesses, and much lower rates.
To see the difference, the chart below compares traditional factoring with DSA Factors to similar programs with PayPal Working Capital, Bluevine, and Fundbox, three of the more popular fintech companies offering similar programs to invoice factoring.
|DSA Factors||PayPal Working Capital||BlueVine||Fundbox|
|Take on New Debt||No, the funds DSA provides you with are yours to keep.||Yes, PayPal is offering you a loan, so you are taking on new debt.||Maybe, if your customers don't pay BlueVine, they will require you to pay them back after 90 days.||Yes, Fundbox is offering you a loan, so you are taking on new debt.|
|Credit Limit||No, with DSA Factors we will fund you for all of your receivables.||Yes, the lesser of 18% of your annual sales on PayPal or $97,000.||Yes, $20,000 to $500,000 based on your company's credit.||Yes, $25,000.|
|Based on Your Credit||No, since DSA is giving your customers a line of credit, credit decisions are made based on your customer's good credit.||No, the loan amount is based on your annual sales volume with PayPal.||Yes, BlueVine will assign you a credit limit based on your credit worthiness.||Yes, Fundbox determines your credit limit based on your credit worthiness.|
|Charges You Interest||No, DSA offers a flat rate factoring fee.||Yes, the interest is charged to you up front when you get a loan, regardless of how long it takes to pay the loan off.||No, BlueVine also offers a flat rate program, but at 10-15% their rates are at least triple or quadruple the rate that DSA offers.||Yes, based on the size of the loan, Fundbox may charge you anywhere from 5-12% over the course of a 84 day loan.|
|Term Limit||No, DSA Factors has no problem working with extended terms.||Yes, PayPal requires you to pay back 10% of the loan every 90 days, with the full amount due in 540 days.||Yes, if payment has not been received after 90 days, you are required to pay back BlueVine.||Yes, you must pay off the loan in 12 weekly installments.|
|Collections Outsourcing||Yes, DSA Factors handles all of your collection work.||No, your customers must make payments through PayPal, but PayPal does not help with collections.||No, your customers are required to make payments to a BlueVine drop box or bank account, however BlueVine does not help you collect.||No, Fundbox does not handle collections for you, it is strictly a loan that you need to pay back.|
|Insure Your Receivables||Yes, with DSA's non-recourse factoring your invoices are insured against non-payment.||No, PayPal only does payment processing for you.||No, if an invoice has not been paid after 90 days of being funded for it, you are required to pay back BlueVine.||No, Fundbox is strictly a loan that must be paid back in 12 weekly installments.|
|Choose Which Invoices You Factor||Yes, DSA Factors does not require you to factor all of your receivables.||No, a percentage of all payments made through PayPal will be applied towards your loan.||Yes, you can choose which invoices you want to get funded on.||Yes, however there is a $100 minimum in order to get funded for an invoice.|
|Minimum Volume Requirement||No, at DSA Factors you are not required to factor a certain amount, and there are no annual fees.||Yes, PayPal requires you to pay back 10% of the loan every 90 days if you aren't doing enough volume.||No, BlueVine does not require you to fund a minimum amount each year.||No, Fundbox does not require you to draw a minimum amount each year, however, they will not fund you if an invoice is worth less than $100.|
|Long Term Commitment||No, with DSA Factors you can stop factoring at any time, but since many of our clients have been with us for over 20 years, we don't think that you will want to stop.||No, once your loan with PayPal is paid off you can start looking for alternative sources of financing.||No, BlueVine allows you to stop drawing on your line of credit at any time, but you will need to pay them back for any invoices that they have not received payment on.||No, once you have paid off your loan with Fundbox, you are free to pursue other financing options.|
|Charge Payment Processing Fees||No, DSA will never charge you for processing a payment.||Yes, you are required to accept payments through PayPal and pay their payment processing fees.||No, although BlueVine will funnel all payments into their account without your customers knowing that BlueVine is receiving the payment.||N/A, Fundbox does not process payments.|
|Available Technology||DSA offers its clients an online portal where they can get automatic approvals, view agers, remittance reports, and other reports in real time. Your customers may also go online to make payments.||With PayPal you get a loan online and customers make payments online.||BlueVine requires the use of Quickbooks or similar software to get funded.||Fundbox requires the use of Quickbooks or similar software to get funded.|
|Good Old Fashioned Service||As a family owned and operated business, you can call DSA at any time and speak with a principal who can come up with creative solutions to help grow your business.||PayPal doesn't even list a phone number on their web site.||BlueVine may have a phone number, but it is doubtful that you will be able to speak to anyone who can actually help you.||Fundbox may have a phone number, but it is doubtful that you will be able to speak to anyone who can actually help you.|
|DSA Factors||PayPal Working Capital||BlueVine||Fundbox|
As you can see, traditional accounts receivable factoring with DSA Factors offers all of the benefits that the fintech companies offer, along with many more. You still get an online portal where you can efficiently do business and your customers can make online payments, but you also can pick up a phone and speak with one of our principals at any time. As a result, we can come up with creative solutions for your business that might not fit into a fintech company's software, such as purchase order financing. So if you are looking for ways to finance your business, go with a time-tested method that works, accounts receivable factoring. Give DSA Factors a call today at 773-248-9000 and we can be funding you in as little as 24 hours.