Depending on who you ask and whose numbers your believe - the problem is either lack of demand (by qualified applicants), lack of supply - or probably both. I think it's no secret that banks are being substantially more cautious on their lending activity. This has driven customers to alternatives sources of financing such as invoice factoring. But there is a catch, although factoring is easier to obtain that most conventional financing options, it's also more expensive. This is not good.
In my (biased) view of the world, the cost that a business owner pays for obtaining financing should be commensurable to the risk that the lending institution is taking. I don't think this is happening right now. So now, this begs the question - why aren't factoring companies charging lower rates?
The simple answer is because the cost of funds for factoring companies is substantially higher than the cost of funds for banks. Banks usually get their funding by offering checking accounts, saving accounts and CD's. They pay very little money for these funds (here are the latest bank rates). Therefore they can lend money inexpensively. On the other hand, factoring companies get their financing from the following sources:
- Other factoring companies
- Bank lines of credit
- Investors
- Shareholder capital and funding
All these sources demand high rates of return - much higher than what a bank pays for its funding. If the factoring company is going to make a profit, they need to charge higher rates than what they are paying for their funding - which is common sense. There are no two ways about it, factoring will always be more expensive than conventional bank financing.
