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 is needed to grow or turn a business around. Having a conversation about Factoring with your banker before you do it is always a good idea.
When bankers recommend a good Factor as an interim funding source, they keep business owners from using the Internet to find their financial partner. That is like marrying someone straight off a dating site. It is simply not a good idea and proper referral is one that is made thoughtfully and with intent.
Factoring buys the business time to prove itself all over again and safely make the improvements needed to once again be bankable. These could include filling in the holes caused by the pandemic, improving supplier relations or growing sales quickly to take advantage of opportunities. Without cash flow distractions the owner can focus on the business while the Factor pays close attention to the receivables.
Since factors only require A/R as collateral the bank can sometimes use more tangible assets to support any exposure. A simple subordination agreement is all that is required for the factor to be able to operate. Agreements can include directions to pay as well as aging reports and daily borrowing base certificates.
A business that Factors has a better chance of becoming bankable sooner. Factoring is balance sheet friendly, offers maximum liquidity and greater flexibility. The bank can trust the A/R to be accurate because it is professionally managed. Some businesses are able to quickly develop positive cash flow and that helps everybody.
When Banks and Factors work together, they provide SMEs a much faster, safer, and more sustainable path to financial success. In fact, the more value a Factor brings to the relationship the less time the relationship will be needed. We have challenging times ahead and it would be good for everyone if Banks and Factors would team up.