Why are Factoring Volumes So High?

June 29, 2015 Bhaji Illuminati

This past year, global factoring volumes reached €2.3 trillion, up 6.3% from 2013 according to Factors Chain international. It’s the single highest figure on record.

Factoring growth was particularly drastic in Europe (8% to €1.3 billion), driven by the commercial banking sector. American factoring growth was also at 8%, with a particular increase in the U.S. (17% to €97.7 billion).

Pete Mulroy, the secretary general of FCI, says that “the factoring industry experienced another solid year of growth despite a volatile economic environment.”

But a volatile economic environment is exactly why factoring volumes have increased so drastically—many suppliers are getting desperate as buyers are delaying payment. A recent New York Times article uncovered that many big companies such as Kellogg and Heinz are asking suppliers to give them as many as 120 days to pay their bills, crippling small businesses and essentially turning them into lenders. Suppliers have a need to get paid early but, often, they find themselves stuck in this helpless setting which forces them go out to the market and agree to unfavorable terms involving high interest rates, time-consuming paperwork processes, and long-term contracts. But what else could they do when they feel they’ve run out of all options?

Well, here’s an option that can give suppliers more autonomy in payment schedules and access to affordable short-term financing: dynamic discounting. If buyers paid suppliers early, they’d cut out the third party (the factoring firm and all the binding contracts and interest rates that go with it); suppliers would get better, more reasonable rates; and buyers would save a lot of money by paying invoices early but a little less.

No business should be subject to such a predatory lending practice, especially if there are other options out there, like dynamic discounting, readily available to them. Because in the end, which sounds more appealing? A financing solution that’s expensive and restrictive, or a financing solution that’s cost-effective and flexible?

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