How Bankers and Factors are Bridging a Financial Gap

While some businesses in some industry segments are having a banner year, many are facing downward trends due to a shortage in raw materials and staff. Subsequent regulatory and policy constraints on lenders are leaving banks in a difficult but not unfamiliar position, as they’re tasked with finding alternative financing for some of the businesses hardest hit by negative financial trends.

Factoring, as it turns out, is the newest partner-hero to banks, and not a second too soon. Since factoring is based on the dollar amount of a client’s accounts receivable instead of credit score and past history, it’s the much-needed solution to an age-old banking dilemma–how to get working capital in the hands of businesses declined for loans.

The fundamentals of factoring

One of the oldest forms of financing in the world, factoring accelerates a business’s cash flow by advancing money when the business invoices a customer for goods or services. The result of this invoice-based financing is working capital that’s available within days instead of 30, 60, or 90 days. Not only does factoring help businesses capture more opportunities quicker, but it also can help with the repayment of any term debt or ancillary lines of credit.

Shared support for cash gaps

While both bankers and factoring professionals operate in slightly different spaces, they can work in concert to help clients whose financial situations have materially changed or who are just starting out. By serving opposite sides of the cash-gap equation, banks and factoring partners also benefit each other directly.

Three ways banks and factors help each other

The benefits banks receive from factoring partners are three-fold, with the first and most obvious being the ability to maintain overall client relationships. When a bank helps provide a source of alternative funding for a client, they’re essentially building a deal pipeline for the future. Once a client’s financial situation changes, it’s likely they’ll return to the bank that assisted and supported them in times of turnaround. Since a factor is not a depository institution nor does it offer the consumer-related services of a bank, the factoring partner simply carves out the client’s accounts receivables as collateral for funding while the bank controls all else.

Secondly, factoring helps banks mitigate default risk via the acceleration of the client’s cash flow. This makes it easy to ensure that term-debt obligations held by the bank are met.

Finally, when a bank partners with a factoring company they know and trust, they can rest assured that all dealings are done professionally and with complete transparency. This brings client care full circle and allows the bank to provide a seamless, positive experience throughout the relationship.

Consider this example. A temp-staffing client whose revenues had been fairly consistent until the COVID-19 pandemic saw their need for workers triple. This bank-referred client needed in excess of $3 million to cover its burgeoning payroll but had only a $1 million line of credit with the bank. AR Funding was able to underwrite and contract this new client in a matter of days. In the end, the temp-staffing client met its customers’ needs without interruption and the bank maintained the depository relationship with the client, the lending relationship on the client’s real estate, and even the client’s treasury services.

In time, the bank may be able to transition the client back to a sufficient line of credit on its books, but for now, it was the bank-factoring partnership that helped secure current and future business for a client in need.

Flexible financing for the win

While bank lines of credit are subject to credit and lending history, factoring looks at the depth and breadth of a client’s accounts receivable base to determine an advance on cash. This makes factoring a fast and flexible option for those struggling to obtain a loan. And since most factors do not include origination, maintenance, audit, or facility fees, the client only pays for the time and money they’ve been advanced.

Good bankers and factoring professionals understand how business owners’ needs change, how the economy ebbs and flows, and how banks’ lending targets fluctuate. By using factoring partners as a bridge in financially challenging scenarios, banks can build their books for the future while helping clients level out cash flow, manage unpredictable payment cycles, and obtain much-needed capital for growth–a real win in anyone’s book.