by Brad Liebmann, Managing Director, Xbridge Ltd
Business Money, November 2006
Invoice finance customers are no longer content with consuming only the plain vanilla deals that the industry has scooped out for so long. Customers who used to be satisfied with a single flavour now demand more. Factors who continue dishing out a single recipe for every customer face increasingly tough competition from lenders offering customers more tantalising ingredients.
The Vanilla Deal of the Past
The industry has long offered facilities with an 80% advance rate to customers who traded in well-understood, highly factorable industries. The traditional Vanilla Deal has no staged payments, little seasonality, low debtor concentration or other complications. Advances in technology and better sector-specific knowledge have transformed the Vanilla Deal. While still "vanilla" in its base, today's invoice finance facility is more typically has added ingredients lacking in the traditional Vanilla Deal.
The New "Cherry-Vanilla"
Factors are enticing new customers with high advance rates (or "cherries"). Cherry-Vanilla is increasingly offered within the industry's most traditional sectors where factors are comfortable managing well-established sets of risks. Increasingly technology is turning cumbersome paper trails for validating invoices into more efficient "e-trails", enabling faster and more efficient lending against such electronic documentation. Formerly, a customer might wait up to a month to access Proof of Delivery (PoD) from a courier. Today PoD's can be viewed online and in real time, increasing transparency. In turn, customers are demanding higher advance rates.
Such customers now typically seek 90% advance rates. And a few specialist factors will advance as much as 100% in the recruitment sector. Customers formerly contented with vanilla now require a healthy dose of "cherries" (in the form of higher advance rates) to make the facility palatable.
The "Tutti-Fruity"
Tutti-Fruity is a Vanilla Deal with lots of chewy bits to get an underwriter's teeth around. As lending in traditional sectors becomes more competitive, progressive lenders are harnessing technology to explore and develop competitive niches in less traditionally factorable industries. Through a combination of sector knowledge and technology, the specialist financier caters to sector "quirks" such as (in the construction sector) CIS status, staged payments and JCT contracts. Where seasonality is an issue, advance rates can be adjusted to allow for seasonal dilution. Such systems reduce attrition as facilities are tailored more precisely to a business's cash flow requirements. Although still "vanilla" at its base, learning to service the chewy bits yields strong competitive benefits for lenders with a more developed palate.
Vanilla Yogurt
Yogurt is the ice cream for a newer generation of customers. New Economy sectors such as technology, media and telecoms increasingly seek invoice finance. A few far-sighted lenders are developing specialisations in such areas -- developing the expertise to comfortably lend in sectors with non-traditional invoicing practices. The commercial potential is enormous; as such sectors of the economy are growing far more quickly than traditionally factorable sectors.
The Vanilla Deal is not dead. But it requires more creative recipes from increasingly sophisticated lenders. Some new ingredients are an acquired taste -- unpalatable without enhanced, sector-specific knowledge and the judicious application of technology.