With access to working capital drying up for small businesses, banks are turning to factoring partners to find solutions.

Banks are facing some tough challenges right now, including surging cyberattacks, volatile interest rates, and rising rates of loan defaults. However, for many bankers, one of the most challenging realities they have had to adapt to is the increasing difficulty in providing financing options for small businesses.

The combination of a volatile economy and persistently high interest rates has forced many banks to impose stricter loan criteria. As a result, even profitable and growing businesses can find themselves unable to qualify for the financing they need to support their continued success. This new reality is making it harder for banks to build trusted, long-term depositary relationships with business customers. 

Crawford Reeves, a Regional VP at AR Funding who works closely with bankers, said he has seen changes in the way banks are approaching customer relationships. 

“Banks are doing everything they can to help their customers, but in some regions of the U.S., they are frustrated because they can no longer do the same things they used to be able to do.” 

Factoring partnerships open new doors

When banks are unable to service their business customers’ needs, forging strong relationships with complementary alternative financing partners can help them provide a more holistic service. 

Reeves has established mutually beneficial relationships between AR Funding and several banks in his region to help them connect their customers to invoice factoring, a type of alternative financing that allows a business to access the cash tied up in their accounts receivable. Because the qualification criteria are different for factoring than they are for bank loans and lines of credit, invoice factoring companies (also known as “factors”) can often provide financial support even when banks can’t. 

For example, banks must base their financing decisions on criteria such as the credit score of the business and the business owners, the business’s credit history, revenue history, and time in business. A factor will place less weight on these criteria and more weight on the credit scores of the business’s top customers and the value of the business’s accounts receivable. As a result, businesses that can’t obtain a loan may be able to free up significant working capital through factoring. 

“Companies that are fairly new and don’t have the track record the banks are looking for can often qualify for factoring,” said Reeves. “So can companies that have a concentration issue, which is when their revenue comes from just one or two customers, or companies that have gone through a bad year or two and need more working capital to turn things around.” 

Factoring remains a low-profile option

Surprisingly, there are still some banks that are not familiar with factoring as a viable financing option for their customers. Reeves estimated that as many as 20% of banks don’t know enough about factoring to confidently recommend it to their customers. 

“It’s fun to see the reactions when I have an opportunity to introduce a banker to factoring for the first time,” he said. “Some never knew this type of financing existed and have no idea how it works.”

Even among banks that have heard of invoice factoring, there can still be some misconceptions. Sometimes bankers think the cost of factoring is much higher than it actually is (fees can be as low as 1.5% in some cases). They may also be surprised to learn that not all factors require businesses to lock themselves into a contract for a specific length of time or a specific volume of invoices. The reality is that factoring is one of the most affordable forms of alternative financing, and much less costly than merchant cash advances or online loans.

Partners in long-term business success 

Factoring can be used as a short-term solution to a specific financial challenge or as a long-term addition to a business’s cash-flow management strategy. But regardless of how long a bank’s customer may choose to factor their invoices, the partnership between the factor and the bank can last for many years. 

“AR Funding has maintained partnerships with some banks for as long as 20 years,” said Reeves. “Once they see what we can do, and the benefits it brings their clients, they start to see factoring as another tool in their toolbox.”

When Reeves is introduced to a banker’s customer, he works collaboratively with them to craft a financing solution.  

“After the bank makes an introduction between AR Funding and their customer, we start with a phone call to understand their financial situation and financing needs,” Reeves explained. 

If he thinks there’s a good fit, the business will begin the application process, and AR Funding keeps the bank in the loop as their customer goes through the process of setting up a factoring account. Once the application is approved, the business can receive cash as quickly as the same day, and they can continue to factor invoices for as long as they need to.

“Ultimately, we want to get them to a point where they are financially strong enough to qualify for the financing they need using low-interest traditional banking products,” said Reeves. “That strengthens the deposit relationship and helps the bank create trust with their customers.”

At a time when servicing the needs of business customers is tougher than ever, partnering with a reputable, collaborative factoring company can help to boost customer success, satisfaction and loyalty, not to mention bank revenues.

If you are a bank or credit union interested in learning more about how AR Funding can help you meet your customers’ financial goals, contact the representative for your region. 

To learn more about our banking partnerships, read:

How Banks and Factors Work Together to Support B2B Companies
How Bankers and Factors Are Bridging a Financial Gap