Factoring: An Engine for American Small Businesses
Small businesses represent the vast majority of the U.S. economy, serving a critical role in global supply chains. Traditional credit sources for these small and mid-sized companies continue to shrink due to the regulatory environment and consolidation of small business banking. Non-bank lenders have steadily increased their presence, filling the void. The unmet capital requirements of these small and medium sized companies represent an opportunity for non-bank and alternative lending originators to aid in this crucial component of the US economy.
Factoring is a solution that helps business owners meet working capital needs, support future growth, fund payroll, and capitalize on opportunities to expand. It is an ideal way for small businesses, who must wait an average of 45 days for debtors to pay while having immediate operational expense needs, to propel their growth. It is a strategy that works for businesses who handle a large volume of invoices, have long net payment terms from their debtors, and need funds quickly. The Factor purchases the business’ invoices at a discount, while charging a fee based on the length of time it takes the debtor to pay. The debtor then pays the Factor directly according to the invoice payment terms. This arrangement provides working capital to the small business much quicker than waiting for the invoice to pay directly.
Factoring is an age-old practice with its roots traced back to England in the form of merchant banking. It was brought to America by early entrepreneurs, and like all business practices, evolved over the centuries. The modern factoring industry underwent significant change in the 1970s and 1980s as banks gradually acquired factoring businesses. A result of this consolidation was that the high level of service that was a traditional element of factoring began to diminish. Realizing that many small and medium sized business needs could be satisfied simply by advancing cash against specific receivable accounts, a sizable number of independent factors opened their doors to fill this market vacancy. Today, there are about 800 factors servicing hundreds of thousands of small businesses. The industry is truly part of the larger global economy, keeping capital moving throughout the system.
Altriarch: Financing the Factors
Factors keep the working capital for small businesses flowing, but who provides that service to the Factors? Understanding the needs of Factors requires an appreciation for how a majority of the market is dominated by several leading firms competing with hundreds of smaller firms to reach small and medium-sized businesses. According to the Secured Finance Market Sizing & Impact Study 2019, there is an estimated $101 billion in factoring volume generated by US factoring firms annually. It is estimated that 16 factoring firms represent 90% of the US market on a dollar basis, but only comprise 2% of the total count of firms offering factoring solutions. The US factoring market is fragmented not only by the large number of firms that offer factoring, but also by factoring’s usage among tens of thousands of small and medium enterprises. The even larger number and wider variation in clients’ customers (the account debtors) mean that factoring’s presence within the secured finance market is widespread and diffuse.
Altriarch’s Factor Finance Fund is seeking to capitalize on the fragmented and underserved nature of small to mid-sized Factors nationwide. The Fund will provide senior secured and mezzanine credit facilities, as well as participation capital to high quality factoring firms across the country. Geographically and sector agnostic, the Fund will leverage the team's 10+ years in the factoring industry to lend to select experienced operators.The factors the Fund targets are currently too small or too new to attract senior bank financing, or they need additional capital beyond their current senior lender’s capacity. The Fund will help propel these Factors along their growth trajectory so they in turn can help propel American small business.
SOURCE MATERIAL
Commercial Finance Association Education Foundation. Secured Finance Market Sizing & Impact Study. 2019.
Factoring, Jones, Owen; Harvard Business Review February 1939 and Factoring as a Financing Device, Silverman, Herbert R.; Harvard Business Review, September 1949; D. Tatge, D. Flaxman & J. Tatge, American Factoring Law (BNA, 2009)
Capstone. 2020 Global Factoring Report. August 14, 2020.
