A factoring bank is a different kind of financial animal. It does not offer traditional corporate credit options to its customers. It doesn't lend money based on a customer's physical collateral, such as bulldozers or fleet of vans. Instead it lends based on the value of a customer's accounts receivable balance.
Customers benefit from this type of loan because they immediately receive the capital from their invoices, often long before their customers actually pay those invoices. This improves their cash flow and enables them to take advantage of unique situations in the marketplace, such as buying inventory that is offered at a discount for a limited time period. The borrower will, of course, pay a fee for this factoring service, and that fee may be higher than the interest charges from a traditional loan. The flexibility of this type of financing, however, can make it attractive at a slightly higher price... especially if it helps the business to save in other areas. But factoring is not available from just any financial lending service.
Traditional banks generally do not engage in factoring, but a few have taken the plunge. Those that do can make a profit when they understand the intricacies of this particular type of loan as well as the characters of the businesses that are interested in acquiring such funding. Banks generally have access to a greater quantity of funding to lend. That in itself makes them attractive to borrowers. But banks also have no need to go out and look for borrowers because they already have a customer base that they can mine. With many small businesses in need of credit, banks should look to their own list of checking and savings customers for such clients.
But a factoring bank must stay involved with the customers to whom it makes this kind of loan. The bank's personnel should monitor the borrower's accounts receivable daily. It must ensure that the borrower is sending out invoices and collecting funds from their debtors in a timely manner in order to maintain the value of its accounts receivable. This may require the bank to get more involved in the day to day operation of its customers' businesses, but that is part of the price that must be paid for profit.
A factoring bank cannot simply ask the borrower to install monitoring software and then assume that everything is working automatically. Banks, above all other financial institutions, know that manual spot-checking is invaluable in identifying potential problems. Incorrect invoices, misaddressed invoices, incorrect receivables postings... there are a host of problems that can occur at a borrower's facility that could wreak havoc on its accounts receivable. The bank must stay informed.
Like any other industry, technology is changing the way business is done. As factoring banks increase, so does the way that they do business. Some factors are taking on more of the responsibility for their customers' accounts receivable. Some factors take care of everything from generating invoices to processing payments and depositing those payments into their borrowers' bank accounts. They, of course, extract their fees along the way. This is proving to be a valuable service to customers as they can cut down on their own staff and processing tasks, thereby saving operating expenses.
Still, a business must determine if the bank's higher fee is worth more than the lower interest that would be charged for a traditional bank loan. It all comes down to research and cash management, as well as an understanding of both the business and the bank.
Corporate Credit Concepts specializes in Commercial Lines. For more information about Commercial Lines and how it might benefit your business, please CLICK HERE for a free phone consultation.