Independently Attacking the Invoice Finance Market
by Colin Bruce, Head of Invoice Finance
Niche Commercial, December 2003
After discussing the responsibilities of bank owned factors in last month's edition, I highlighted the market dependency upon the banks to seize the initiative and proactively grow the market. This month I would like to address the role of the independent invoice finance houses and how their strategic and tactical growth strategies will have a major effect upon overall industry growth. In order to do this, the state of the market must be assessed.
Changing Market Dynamics
The route to market for this product is changing fast; going direct to the factor is becoming preferential to many customers over allowing the Key Business Introducers (KBIs: accountants, solicitors, brokers) to intermediate on their behalf. Where once the KBI market was the prime driver of leads to the sales team and the sales managers spent significant golf course time trying to win over that market, this is becoming less effective.
In going directly to the lender the customer initially seeks out that which they are most familiar with. Due to the expensive nature of branding campaigns and general awareness raising tactics, the bigger providers have an advantage: brands instil comfort and trust. Trust allows business to be written - sometimes regardless of the underlying quality of product and service. This is becoming more of a threat to the independents as the banks have reassessed the importance of this type of funding.
Banks Becoming More Aggressive
It was once the case that the major banking incumbents either put no strategic focus on their invoice finance division or had no invoice finance division at all. This has changed markedly with several banks considering their invoice finance offering as central to their retail commercial finance strategy. This shift has forced an aggression into the market and where a bank's sales representative would once price in an opportunistic manner they are now often the cheapest.
The Future of the Independents
So where does this leave the independent? Speculation over a market polarisation and consolidation having started and carrying on over the next couple of years is pandemic within the industry. Strategic direction is critical and correct evaluation of each independent's proposition must happen: being stuck without volume or a unique proposition could be the death knell.
However, once these questions have been addressed, the astute sales/marketing director will identify opportunities to grow market share and, more constructively, the invoice finance market as a whole.
Know Your Niche
Having decided to specialise in an area it is crucial to then become part of the fabric of that niche, regardless of what it is. Resource Partners, the health care and pharmacy specialists, make a point appearing at every related event, expo or awards dinner while the sales team know the target industries and specialised funding requirements intimately.
Achieving brand recognition within a specific industry or region is far less cash intensive. It is also possible to inject more personality into communication with potential customers
One key advantage being a niche player provides is the ability to say "no". Focus is a real issue to many independents: why pitch to that £1million recruitment company when you know deep down it's as close to a commodity as the market gets? Time should be spent developing any competitive advantage further and creating barriers to entry for any competitor. Banks operate on sector risk limits but risk concentration can be mitigated by having the in-depth knowledge of that industry, enabling proactive decisions - not reactive withdrawals from a sector.
New Channel Communication
Emerging channels to market, principally garnered through IT and the internet over the last five years, are an exciting development for the independents. The internet enables a unique opportunity because it is a mass market medium, yet one can precisely target the type of lead desired. Filtering software allows exact risk profiles to be generated in real time from those seeking finance e.g. industry, turnover, gearing, company age and debtor nature. Brand still plays a role, but if tailored marketing messages are delivered to the target market, the playing field is levelled.
A specific message to a specific type of client can no longer be allowed to remain "We are different from a bank, you are not just a number to us and we understand you". At some stage every independent uses this mantra but is the customer really understood? Is the customer being uniquely offered something that no other provider can? Can that be effectively communicated?
Break the Mindset in New Strategic Partnerships
Strategic partnerships have in the past been limited to the usual suspects: vertical representative bodies, franchise schemes, etc. But by focusing on chosen niches or even by looking at the existing book demographics a clearer picture emerges of who should be targeted. Once the photo-fit is created a bit of lateral thought is needed to reach the target. Specifically, what are the key elements that bring the target together? For example, do they buy a similar product or require an insurance cover unique to the industry? Who do they buy these from?
Frequently the one factor which kills new partnerships is the reliance of the factor on the distribution of the factor's product on the partner. Sales teams are asked to spot opportunities they frequently don't understand and sell a product they know nothing about with limited rewards. The added value of the partner is usually data. As long as a coherent data management, contact management and lead management system is in place, this data is best exploited directly by the factor. Such a system is integral to effectively cultivating a partner relationship.
Don't Re-Acquire Prospects
Consider the situation: a potential customer meets a sales manager but due to one of a multitude of reasons does not pursue a facility. The sales manager assigns it to his "maybe one day" pile with the intention to call in six months. Six months later the lead has been forgotten and, if business is to be done with that potential customer, the marketing team must re-acquire the lead. How much will that cost and how could it have been avoided?
Lead management systemisation and, as much as is possible, automation enables maximum value to be derived from each acquired lead. Lead acquisition costs are reduced. A farmer who cultivates potential customers with continuing long term communication is far more efficient and bountiful than a hunter who captures leads at the exact moment funding is required.
The FDA: Strength in Numbers
Developing a brand is an expensive and long term proposition. Grouping together as an industry under one flag is far more effective. The Factors and Discounters Association is not just a body for regulation and education - it is an opportunity to cost effectively promote invoice finance and generate more business for all members.
This requires an aggressive PR and customer education campaign. The results would be advantageous for all members.
Summary
The future appears bright for some independent factors. Bibby Group Factors have reached critical mass via aggressive acquisition, tight management of risk profiles others decline, and successful brand building. Others have begun to differentiate their product and unique proposition, enabling them to carve a niche in the market. The future for some remains uncertain.
Advanced systems and software will help the independents, but mindsets must be changed before opportunities are exploited. Crucially, growth must come from new customers to the industry - not just from customers the banks fail to capture, but from highly targeted campaigns aimed at the specific niche customers new to invoice finance.