Why Factoring isn't going anywhere
The factoring trade has been around for thousands of years. For as long as there has been some form of trade credit, there’s been an opportunity for businesses to get faster payments by giving up a percentage of what is due. Now, with the introduction of certain technologies like blockchain and faster payment services like Venmo, PayPal, Zelle, and other instant payment platforms, many wonder where the factoring industry stands in this ever growing and changing field.
The truth is that the above payment platforms offer many more opportunities for faster and more efficient payment processes but they shouldn’t be viewed at as a threat. The real heart of the discussion lies at the underlying meaning and purpose behind what trade credit is and why it has become such normal practice in every B2B industry throughout the world. Trade credit allows businesses to deliver products or services without immediate payment. It is commonly used as a form of short term financing, but is also used to ensure that products and services are in good working order prior to approval and payment.
The most common form of trade credit is for businesses to agree to pay another business in Net 30 day terms after services have been rendered. This 30 day period allows for sufficient inspection, acceptance, and processing for payment. Trade credit is extremely important within the transportation industry because the products that are being delivered are sometimes large and bulk items that require further inspection to ensure that everything is delivered as promised.
As consumers, when we walk into a store to buy something, we inspect it, try it on, and initiate payment on the spot. In business, it’s not always as simple as this. If my business is a computer distributor and I’m receiving a shipment of 200 computers, it’s nearly impossible to test all of the machines and verify that everything was delivered with no damages and that there aren’t any issues that need to be addressed. The majority of the time, the equipment will sit in a warehouse for counting, inventory, and inspection so to make a claim that the products are delivered as promised on day 1 would be irresponsible as a business owner.
Where does trucking come into play and why won’t factors be at risk for the payment platforms listed above?
Well, the answer lies in the fact that trade credit isn’t going anywhere. Sure blockchain and other services allow for more efficiency for payments and to mitigate against fraud but what happens if we try to initiate payments on day 1 for all parties involved and do away with trade credit?
Here’s the example:
A commodity is being shipped across the United States and during transit, certain straps come undone or break, and the commodity is damaged significantly internally but the carrier fixes the straps en route and when it’s delivered, everything appears to look fine on initial inspection. Shipper gets paid for the products by their customer; Broker gets paid by the Shipper; Carrier gets paid by the Broker. This all happens on day 1 once the product is delivered.
The product appeared to be fine so now it sits in a warehouse for 2 weeks in the inventory until its ready to be used, sold, or distributed. Upon further inspection, the products internal components are damaged and nothing works properly. Sure, there are contracts in place that guarantee the products can be returned but what happens when the damages are found to be the carrier’s fault? The Shipper must cover the costs of the damaged goods and if they can’t be salvaged, then insurance needs to cover the damages. In a transportation transaction, the Shippers insurance liability is offset by using the services of a broker, and then offset even further by carriers requiring insurance to cover the freight they’re carrying. What happens if the broker found a spot carrier and forgot to get their insurance information? Or better yet, the carrier’s insurance expires during the actual transition of the freight being delivered.
These all sound like far fetched scenarios but believe it or not, they happen all the time. In these scenarios, where the carrier’s insurance doesn’t cover the damages or claims are rejected because the damages are found to be the fault of the driver, there is no recourse against a carrier that’s already been paid. If the carrier was paid on day 1 along with all of the other entities, then you’re dealing with an uphill or possibly a legal battle to resolve an issue that could have been mitigated if trade credit were used.
The bottom line is that payment service technologies have a great concept and underlying principle application for businesses, but certain attributes for B2B transactions will remain untouched because of long standing business processes and risk associated with insurance liabilities.
As a Shipper, Broker, Carrier, Factor or any other entity in the transportation transaction, it’s important to realize that certain technologies are right around the corner. But to think that these technologies will cause systemic changes over a 6-month period simply won’t happen.