Banks and factors make good working partners because neither can provide what the other can offer, and both want their clients to succeed and grow. Every business is different and has its own challenges but when banks and factors work together, they provide both the flexibility and control that will be needed over the next few years.
When bankers present factoring as an alternative, they help keep business owners from using the Internet to find financial partners. We were just down that road with Fintech Lending and it did not work out so well. A proper referral is one that is made thoughtfully and with intent.
Factoring buys time for a business to prove that it can turn itself around and make improvements to become bankable again; like filling in the holes caused by the pandemic, improving supplier relations and growing sales quickly. Without cash flow distractions the owner can focus on these very important areas.
Since factors only require A/R as collateral the bank can use other more tangible assets to support the GSA. A simple subordination agreement is all that is required for a factor to operate. Agreements can include directions to pay into a specific account and allow the bank access to cash and aging reports as well as daily borrowing base certificates.
A business that factors has a chance to be bankable sooner. Factoring is balance sheet friendly, offers maximum liquidity and therefore provides greater flexibility. The bank can trust the A/R to be accurate because it has been professionally managed and most importantly, the business can quickly begin to develop a history of positive cash flow.
When banks and factors work together, they provide small and mid-sized businesses a much faster, safer, and more sustainable path to financial success. The more value a factor brings to the relationship the shorter time the relationship will be needed. There are challenging times ahead and businesses can really benefit when banks and factors team up.