- KeyBank Expands Commercial Banking Teams in Chicago and Southern California to Serve the Middle Market
- Provident Expands Commercial Lending Team as Part of Regional Growth Strategy for Eastern Pennsylvania
- Appraisers See a Mixed Picture for Valuations
- SLR Business Credit Adds Mark J. Simshauser as Senior Vice President Supporting Growth in Northeast US
- Bob Seidenberger Joins Franklin Capital as VP of Sales
5 Key Strategies for Building a Successful Factoring or ABL Platform
November 7, 2024
By Vince Mancuso
Building a factoring or asset-based lending (ABL) platform that maximizes value and attracts capital requires more than operational success. A solid foundation that positions the business for growth, efficiency, and sustainability is crucial. Whether you're looking to secure capital through banks, non-bank lenders, or investors, here are five essential strategies to build and grow a high-performing factoring or ABL business:
- Scalability: Building for Growth and Control
Scalability is about ensuring your platform can grow efficiently and sustainably. In the early stages, one or two people might handle most processes, but this model won't support long-term growth. Without proper systems, bottlenecks emerge, preventing your business from scaling smoothly.
Having checks and balances is key, even when your team is small. Lapses in controls — like failing to reconcile your collateral management system with treasury and accounting — can result in overadvances and unaccounted-for funds. Fixing these issues after-the-fact can take weeks, costing time and money. By establishing dual controls, thereby ensuring more than one person reviews key processes, you'll minimize errors and set your company up for scalable growth.
On the technology front, select scalable software for managing collateral that supports long-term growth. Consider tools that handle client onboarding and integrate underwriting processes, as well as more traditional CRM systems. Consulting with operational experts and capital providers early can help you plan for scalable growth. Implementing robust technology infrastructure that can handle increased transaction volumes and developing standardized processes that can be easily replicated as you expand are key to achieving true scalability.
- Experience Matters: Building a Knowledgeable Team
Having an experienced team is non-negotiable when raising capital. Factoring and ABL platforms are inherently risky, and lacking industry experience makes securing capital even more challenging. Beyond credit risk and liquidations, industry knowledge is essential in detecting and preventing fraud as well. Experienced team members are better equipped to identify red flags and mitigate issues before they become costly mistakes.
For example, trucking is rife once again with double brokering and fraud schemes that can cripple an inexperienced lender. In staffing, managing payroll and unpaid contractors requires intricate knowledge, especially when it comes to earned vs. unbilled revenue. For construction, understanding how to protect your firm from subcontractor payment issues can make the difference between profit and loss.
With higher advance rates and lower fees, a single loss can significantly impact your firm. Having a team with a strong grasp of these industry-specific risks will not only protect your portfolio but also reassure investors and capital providers that you're capable of managing complex lending scenarios. Partnering with industry veterans as advisors or board members can also bring invaluable insights and credibility to your platform.
- Referral Relationships: Cultivating Deep Loyalty
While strong business development officers (BDOs) can bring in deals, the real value lies in the loyalty of the underlying referral relationships to your company. If your referral sources are loyal to the company, you’re less vulnerable when a BDO leaves. Building strong relationships company-wide with referral sources is critical. If these connections trust your platform and processes, they'll remain committed to you, not just the people representing your firm. This loyalty builds long-term business stability and growth, which is especially attractive to potential investors and buyers.
Developing a company-wide approach to nurturing referral relationships is essential. Consider implementing a CRM system to track and manage referral sources and offer value-added services or educational resources to your referral partners. Hosting regular events or webinars can strengthen relationships and showcase your expertise. By focusing on building deep, company-wide loyalty with your referral sources, you create a more stable and valuable business model.
- Bench Strength: Avoiding Bottlenecks and Ensuring Succession
When a business is too reliant on one or two key individuals, it limits growth, creates bottlenecks, and poses succession risks. Investors prefer companies where responsibility and expertise are distributed throughout the team. Strong bench strength—across credit, underwriting, risk management, and operations—signals that your business can function effectively even if a key individual leaves.
Beyond operational efficiency, having a well-rounded team is crucial for attracting top talent. If your entire platform is built around a few individuals, A-players may avoid joining your firm if they don't see opportunities for growth or advancement.
To build bench strength, develop a comprehensive succession plan for key roles and cross-train employees to ensure knowledge is shared across the organization. Implementing mentorship programs can help develop junior talent, while creating clear career progression paths can attract and retain top performers. By focusing on building a strong, diverse team with depth in all key areas, you create a more resilient and attractive business for both employees and investors.
- Niche Focus: Differentiating from Competitors
A well-defined niche is one of the most effective ways to set your factoring or ABL platform apart. Niche players generally face less competition and benefit from stronger margins and client loyalty. Whether your focus is on industries like healthcare, transportation, staffing, oil and gas, or manufacturing, having a niche can drive profitability. Specialization also tends to attract higher valuations, as niche-focused companies are seen as less vulnerable to commoditization and more capable of sustaining long-term profitability.
Buyers and investors value firms with a strong competitive advantage and a clear focus. To effectively leverage a niche focus, conduct thorough market research to identify underserved sectors. Develop specialized expertise and tailored products for your chosen niche and build a strong brand identity around your specialization. This approach can allow you to command premium pricing and achieve higher valuations. By becoming the go-to expert in a specific industry or market segment, you create a powerful differentiator that can drive long-term success and attract investor interest.
Summary
Building a successful factoring or ABL platform requires careful planning, strategic investments, and a strong team. By focusing on scalability, hiring experienced talent, nurturing loyal referral relationships, building a strong bench, and carving out a niche, you can maximize the value of your business and attract the right capital partners. With the rise of new disclosure laws in various states, understanding regulatory compliance is increasingly important, as it impacts transparency and investor trust. A business built for long-term success has the people, processes, and tools needed to grow efficiently and sustainably.