Editor’s Note: Aditya Birla Minacs’ Shweta Verma, along with Ramesh Revuru, is participating in the 18th Annual Factoring Conference by the International Factoring Association (IFA) in Huntington Beach, California over April 18-21. Minacs is launching Factorin SaaS at the conference; make sure you catch up with them at Booth 21 for a demo!

Midmarket companies and small businesses have always turned to Factors to augment working capital and drive business growth. Despite its risks for both factors and small and medium sized businesses (SMEs), Factoring is today considered as a viable and mainstream short-term cash management tool.

Strict central bank regulatory guidelines for funding SMEs and micro SMEs restrict the ability of banks to fund these businesses, but provide opportunities for Factoring companies to step in and help with their immediate finance needs. Factoring growth in recent times is driven by many businesses leveraging it to overcome tight cash flows, the difficulty in obtaining normal banking finance and the cost of such funds.

Factors also often offer accounts receivable services, including thorough credit checks, accounting data entry, collections and advisory services. This clearly allows businesses to reduce their costs of performing these "non-core" tasks in-house and focus on their core operations. The growth in Factoring globally is the result of its growing value proposition vis-a-vis its risks and costs.

One of the main challenges faced by Factors is finding the right clients. To finance potential clients and new business, they rely on their ability to gather accurate and authenticated information from various sources. Thorough due diligence of the client organization, its invoices and the credit information of its customers helps them to make the appropriate risk evaluations.

Because of the need for accurate market intelligence, Factoring companies categorize seller and buyer deals and deal with them differently. With the intensely competitive nature of the business, building the competencies and technology infrastructure prove to be competitive advantages in turning around financing decisions and customizing specific deals for key clients with flexibility.

Other key challenges faced by Factors is accurately pricing products and managing risks taken on during the course of business. Any inadequacy has adverse effects especially since risks are dynamic and demand the ability to respond dynamically as well. Clearly, technology has a crucial role to play in helping Factors monitor the risks in their portfolio efficiently.

Debt recovery continues to be a major challenge especially in the developing world and could be slower compared to that in developed nations. Factors are often forced to write-off large volumes of invoices as a result of nonpayment from debtors. There can be substantial legal issues associated with Factoring deals at various stages of transactions, making it increasingly important to track and manage, and thereby mitigate such risks.

Factors also deal with clients and buyers located across the globe. In this business environment, ensuring sustainable quality service is a challenge. Factors should opt for technology that supports the front office and allows sellers and buyers to login remotely to make their transaction requests. They also should be able to monitor transaction request status from their respective premises and generate all necessary reports.

Many Factoring companies still use non-specialized or manual systems to support the business. Without seamless, full Factoring functionality support (not provided by generic core banking software or accounting systems), they indeed find it difficult to manage their operations, risks and profitability. To meet the above challenges and to effectively capture opportunities that the growing space offers, Factoring companies and banking institutions offering these services need to deploy best-in-class systems, like Minacs Factorin solution.

From our years of experience supporting the Factoring business, we find that apart from domain-specialized functionality, such a system today must provide:

• End-to-end operational support: not only integrating the front office and back offices, but also outsourced processes offered under factoring including invoice verification, verification of proofs of delivery or proofs of services rendered (e.g., bills of lading, delivery confirmation, etc.),discrepancy management, invoice punching and authorization, payment processing, collections, and dunning/follow-up.
• Electronic Invoice Presentment and Payment (EIPP): Technology is the key enabler to greatly automating this crucial Factoring process for sellers to present invoices to buyers and realize their payments. The Factoring company's front office acts as an intermediary, aggregating invoices and collecting payments, efficiently trying to eliminate the need for point-to-point transactions. Clearly, the solution should easily integrate with the firm's finance and accounting back end system as well.
• One stop Web and mobility-enabled solution: The technology solution should effectively provide a platform that enables banks and Factoring companies to offer their clients a Web-based interface for online management of various trade instruments and transactions. Given the dynamic nature of the business and its risks, the solution must leverage mobility technologies to allow users to initiate/monitor transactions, approve and generate reports "on the move".

Given the above, like in most industries, I see that cloud computing will have a broad, long-term effect on the Factoring business. Access controls and data security have been concerns that need to be addressed, since the public cloud does not come with sufficient security features built in. Therefore, in the near future, we will see an increased focus on hybrid cloud computing, combining external public cloud services and private clouds.

You might also like:

• Factoring With a Single Click
• Financing Through Factoring? Don't Let Chargebacks and Deductions Affect Your Dilution Rate
• As a CFO Have You Considered Tracking COFF? Why the Time Is NOW!
• An Outsourcing Framework for Transforming CFOs

Events:
Join Shweta Verma and Ramesh Revuru at the 18th Annual Factoring Conference April 18-21 in Huntington Beach, California.