In ancient Babylon, longtime ruler Hammurabi (1792-1750 B.C.E.) included a section in his famous code that described the rules for factoring. Yes, even in those days before telephones and trucks, traders needed capital. The ability to sell their accounts receivable enabled them to obtain capital and buy more goods until the next camel rolled in with their payment.
Factoring thrived in the mill towns of 14th century England as fabric became a global commodity traded throughout Europe. It came to the New World with the Pilgrims and spread through the colonies as tobacco and cotton farmers and merchants needed liquidity while their products traveled on slow boats to and from England.
In our sophisticated financial world, lenders and borrowers have many ways to arrange loans and capital. Although factoring is no longer the most popular method of finance, it still enables companies to sell their accounts receivables for a percentage of their value. The advantage is the company does not take on additional debt to obtain the capital. Now, like lending, factoring has moved to the internet as young fintech companies offer online applications with the click of a mouse, and small businesses and entrepreneurs are finding this old method is a new way to obtain access to working capital.
Drake Grey started his company, Bowtie Marketing, on his dining room table. Like many entrepreneurs, he soon discovered that invoices due in 30 days were extending to 60 days, leaving him short of cash to maintain the business.
“My employees were really frustrated,” Grey recalls. “They were being paid late because the checks were coming in late. I was losing good employees.”
Simple Online Interface
Grey had never heard of factoring. He spotted a BlueVine ad on Facebook and did some research. It sounded too good to be true. Even when he applied the first time, he was skeptical.
“The simplicity of the BlueVine interface is really amazing. They walk you through the process the same way I teach people to do marketing. At first, I was a little uncomfortable about it. Why are they going to be fronting money for a stranger like me? But they started me with $5,000 in funding, so I said, ‘let’s give it a shot.’”
Grey says that he now processes most of his midsize invoices ($750 to $1,000) through BlueVine. He also uses the company for other services.
“All of my checks pass through BlueVine, and they just deposit them in my account with no fee. If I need an invoice factored, and I put it through in the morning, the money is in my account by 4 o’clock. The process is simple.
“Now my company’s future is so bright. I can run the company the way it should be run, and my employees are all paid on time.”
This is music to the ears of BlueVine founder and CEO Eyal Lifshitz, who did not grow up in the factoring world. He was a principal with venture capital firm Greylock Partners IL and an associate with McKinsey. He has an MBA from the University of Chicago. But his father and his grandfather were small business owners, and he was familiar with cash flow difficulties like those that Bowtie experienced.
Disrupting the Lending Industry
“I was looking for a way to disrupt the lending industry,” says Lifshitz. “I started learning about factoring. It’s been around forever, but the more I learned about it, the more I saw that it hadn’t been innovated on, in contrast to everything else that was going on in lending. I wanted to modernize it and make it a streamlined process where the borrowers can click a button and get money.”
Lifshitz started the company in 2013 and raised $64 million in financing from Greylock and other venture capital firms. The online launch was in spring 2014, and the firm expects to complete $200 million in funded invoices this year.
“We have two types of customers,” says Lifshitz, “One type has worked with factoring, and they get it. They are just amazed that this [the online interface] is for real. They ask me ‘is this how it really works?’
“The people who don’t know about factoring just see us online, and they take a little more education to learn how the product works.”
He adds, “Although we’re an online company, we have people here who take the time to speak with small business owners.”
Joseph Voegele, owner of a construction company in Philadelphia, was the type of customer who had not thought about factoring.
“I knew it was a retail function in the past,” he says, but he hadn’t thought of using it to solve his business problems until a friend recommended 48 Factoring, another Philadelphia company.
Voegele says his company usually does jobs in the $500,000 to $3 million range. But he had an opportunity to do a $10 million job that would have stretched his capital.
“A friend of mine had used them, and recommended the company,” Voegele says. “I started talking to them about our needs to see if there was a fit. We’ve used them three or four times over the last month. They’re very easy to deal with. We just send them the info, and within 48 hours, they say the money’s there.”
Voegele acknowledges that 48 Factoring is more expensive than going to a bank for a loan, but his company filed Chapter 11 in 2004 and its “ledger is not strong enough for a bank loan.”
Still, he says, “All the expenses are spelled out. They’ve met every need that I’ve had so far, and it’s allowed us to have the capital we need if we have commitments and obligations and the cash isn’t coming in fast enough.”
Like BlueVine, 48 Factoring is about a year old. Director George Bessenyei was familiar with factoring, having spent 10 years working for some large factoring companies in Europe. Before starting the company in 2014, he was a computer programmer. He believes that the technology background distinguishes his company from traditional factors.
“We have a whole different concept for what we are doing. We are not coming from the financial space, we are coming from a technology space,” he says.
Technology Companies Provide Finance
“I see us as a technology company that provides finance,” Bessenyei says. “We use technology in every aspect of the business. We use our own platform of proprietary software. It’s all about execution. How you compete, making it cheaper and more affordable for your clients. With the online procedure, it takes about five minutes to see if there is a red flag. If there isn’t, you go back and offer the clients a contract. They can sign electronically.”
At 48 Factoring, after applying and being accepted, each client is invited to a special web page, where they learn how much funding is available for them. Clients can select their terms and how much they want to gross.
“They see how much we will provide, and how much they will pay. We have never had any complaints,” says Bessenyei.
48 Factoring’s original funding came from its board of directors and “friends and family.” It closed its first financial year by funding $9 million in contracts. The company’s goal is to reach $60 million by 2017 and $1 billion by 2020. Bessenyei says the company is currently in the process of raising capital from institutional investors.
“You have to be a certain kind of company to qualify for traditional invoice factoring,” says Bessenyei, who estimates that about 60% of his clients have never tried factoring before or wouldn’t qualify by conventional standards. The large factoring houses, he says, are “financed by big banks and are very conservative in their attitude towards technology.” He says fintech enables factoring to “go to a lower level” and meet the needs of small business owners, the way that fintech lending companies like OnDeck and LendingTree do. For Bessenyei, that lower level is $10,000. The company’s clients include bakeries, cafes and florists — not your traditional factoring clients.
With clients like Bowtie, BlueVine can serve an even lower financial level, though its credit lines run up to $250,000. Other BlueVine clients include CPAs, freelance writers and graphic designers whose invoices do not reach even the $10,000 level. The company also offers a line of credit up to $30,000 and a special product for truckers that offers a 95% advance for freight fees with a 5% flat fee.
Lifshitz says BlueVine is planning to unroll a new product to target the transportation industry in the near future, and he would eventually like to create a global presence for the company.
Better Customer Service
Both Lifshitz and Bessenyei agree that technology creates a better customer experience and adds transparency to the process.
Lifshitz says that some of his customers use BlueVine for a while and then “graduate to bank financing.” But often the companies still use BlueVine at some level.
“We’re there to help them along, even if they work with a bank, we can work side by side,” Lifshitz says.
“We’re not a nonprofit, but the way we think about it, we try to create a win-win with our clients. We’re looking to build a relationship with our clients. We’re looking to be their partners.”
At Bowtie, Drake Grey would agree.
“Popping that information into the computer and putting my trust in them was a really good decision,” says Grey.
“BlueVine is always available and willing to work with me. They might have saved my business.”