November 4, 2016
The invoice factoring business – now a $3 trillion-a-year global industry – can be traced to ancient trading practices and medieval financial arrangements. Yet the premise, getting paid upon completion of work rather than waiting weeks or months for customers to pay their bills, remains unchanged. Imagine a weaver sending linen from Cairo to a merchant in Damascus, but the merchant won’t pay for the fabric until he sells it. A factor, a third party with adequate resources and either personal knowledge of the merchant’s good reputation or the wherewithal to track him down and collect payment, will advance the weaver the money he is owed, minus a hefty fee for taking on the risk of non-payment.
For centuries, the dual issues of verifying that the hypothetical shipment was sent and received and then guaranteeing that the merchant would pay were the crux of the factoring risk equation. The individuals who factored bills for clients had to go with their gut when sizing up the client’s customer. Would he pay or not? If the customer claims that he didn’t get the goods, where’s the proof?
Those verify-and-guarantee obligations continue to be critical for the modern factoring company, but its methods have evolved from case-by-case judgment calls to millions of transactions a year at the speed of light. Although the client relationship may remain one-on-one with a factoring company’s account managers, often with extensive phone and email communication, the behind-the-scenes electronic processing of invoices is totally driven by technology.
Interstate Capital, a factoring company processing about $1 billion of invoices annually, considers itself in the tech business – a high-tech company expediting working capital to over 1000 clients a year. We are constantly investing in new technology to help our clients get funded faster than ever before says Tony Furman, president and co-founder of the international firm founded in 1993.
As recently as seven years ago, Interstate Capital’s clients would fax, mail, or overnight the day’s invoices to the company and then follow up with notices that their customers had received the goods or services. Stacks of invoices would be sorted and checked against stacks of proof of delivery documents for goods and receipts for services. Lastly, checks for the advances on the invoices would be requested, cut, and mailed to the clients, with piles of paperwork left for filing and storage.
Improvements in scanning technology, advances in banking reports and accessibility, and even GPS capabilities have resulted in faster processing of payments, greater economies of scale – and, the good news for today’s clients, much lower factoring fees, thanks to instant and accessible verification processes. Using a combination of proprietary and third party applications, some cloud-based and some hosted by a room of roomful of secure servers, Interstate Capital also grants clients the Holy Grail for accounting: complete transparency and real-time access to the status of their customers’ payments.
Here’s a quick look at how technology tackles the first factoring challenge: verifying that work was completed. Since the vast majority of trucking companies across the country factor their freight bills, let’s use that industry for an example. Think of a mom-and-pop business with one driver on the road. For years he would mail home his bill of lading (the document used industry-wide to record route, cargo, weight, load number, etc.), along with a rate confirmation sheet outlining what the shipper will pay and the signed proof of delivery. His bookkeeper (read wife) would then type up an invoice to mail to the customer with those documents. By the time the customer gets the bill, a week or two have passed since the freight was unloaded. Then the shipper gets to take 30 days or more to pay for that load.
Today, the shipper can verify when freight was picked up and dropped off by tracking the driver’s location through cell phone apps with the GPS locators; most apps ping the driver’s location every few moments. The phone also provides scanning technology to take high-quality images of the bill of lading, rate confirmation and proof of delivery. These docs get seamlessly uploaded straight to the factoring company – no more mailing back and forth.
Other drivers use traditional scanning equipment at truck stops or submit their paperwork at drop boxes in truck stops everywhere. Those documents are scanned into the factoring company’s records as soon as they are received for faster funding. Optical character recognition (OCR) technology captures data from documents to pre-fill forms for better accuracy and faster processing.
Technology’s approach to the next challenge, getting paid back by the client’s customer for the advance extended to the client, takes the gamble out of the guarantee. Once a call left to an expert’s eyeball-to-eyeball evaluation of a customer’s ability to pay, confirming the creditworthiness of customer online is now instantaneous. With Interstate Capital’s payment database of over 100,000 customers available for clients to peruse, they can make educated decisions about the jobs they take on and the risks they want to assume.
In the factoring world, technological advances dramatically simplify the verification process, ramp up the speed of funding (now more likely wire transfers and ACH deposits than checks, increase accuracy, and offer instant access to once-elusive credit histories to support -- or deny -- guarantees of payment. The result: lower hurdles for small businesses to gain access to working capital and lower factoring rates across the board. New technologies are on the horizon to continue the growth of high-tech factoring companies.