How Banks and Factors Work Together to Support B2B Companies

In this article, we’ll look at the ways in which bank loans and invoice factoring offer complementary financing types that can help B2B companies access the funds they need to mature and grow.

As a B2B company grows and matures, it goes through different stages, and at every stage, its financial needs will change. Most companies go through periods where expansion, contraction, or a new business direction place unexpected demands on their cash flow and require them to seek financing. By understanding the full range of financing options available to them, B2B companies can make choices that meet their needs best.

While every company is aware that traditional bank loans can provide business financing, far fewer companies understand the role that invoice factoring can play in supporting business stability and growth. In fact, these two financing options complement one another, providing fuller coverage for companies at different stages in their growth. Many B2B companies, whether they deliver products, services, or both, find that shifting between bank financing and invoice factoring based on their business requirements enables them to maximize their growth potential.

Bank loans aren’t always the right choice

For companies that qualify for traditional financing, a bank loan can provide access to funds at competitive interest rates. However, there are many reasons why a healthy, viable business may be unable or unwilling to seek out a bank loan or line of credit:

• The company may be new or a startup that doesn’t have an established credit history.
• The company may have experienced financial losses in the past.
• The company’s ratios of debt to net worth may not meet the bank’s minimum criteria.
• The company runs a lean staff and prefers not to deal with loan administration and paperwork.

Factoring uses different lending criteria

In cases where bank loans are not the right fit, invoice factoring may be the solution. While a bank loan or line of credit requires the company to demonstrate an established credit history and certain debt-to-asset ratios, a factor has different lending criteria.

A factor will look at the quality of the company’s accounts receivable and its potential for sustained growth. Based on these criteria, the factor can advance a loan for 90% or more of the cash value of any invoices the company has issued. The company can decide whether to factor all of their invoices or only a portion, depending on their funding needs.

For example, Huddled Masses, a programmatic marketing technology company, experienced high growth and needed to generate enough working capital to support service delivery to a rapidly expanding customer base. Because the company didn’t have the assets or cash flow required to qualify for a traditional bank loan or line of credit, Mark Walker, Managing Partner at Huddled Masses, looked at invoice factoring as an alternative funding option. Factoring customer invoices enabled the company to stabilize cash flow and, ultimately, shift from factoring to obtaining a bank loan.

“Factoring with AR Funding allowed us to grow our business revenues by 25% year over year,” Walker said. “It also allowed us to execute our strategic growth plan and graduate to traditional financing. The partnership was truly a win-win for us.”

Banks and factors work together to find solutions

Because invoice factoring and traditional loans provide complementary support to B2B companies, banks and factors will sometimes work together to support a company’s needs.

For example, the Bank of Clarke County and AR Funding often refer clients to each other or collaborate on a solution to meet a specific client’s financing needs.  

“If a client doesn’t qualify for bank financing, or if I need to supplement my risk, I can work with AR Funding to find a solution,” explained Michael Marsden, Vice President of Government Contract Lending at the Bank of Clarke County. “If a client can handle a small line of credit, but needs access to additional funding, I’ll take on a portion of it and have AR Funding take on the rest. It works out really well.”

For example, Marsden recently met with a female veteran who needed funds to support a government subcontracting job for a large, established engineering firm. Her company was too new to meet the bank’s lending criteria, but Marsden referred her to AR Funding, who was able to help her obtain the funding she needed based on the creditworthiness and financial stability of the company she was contracting her services to.

 Financing at every stage of company growth

When it comes to B2B company financing, there is no one-size-fits-all solution. Companies that are focused on managing risk and accelerating growth are likely to require many different types of financing at different stages in their development. While bank loans are one of the most popular forms of business financing, invoice factoring can help fill the gaps and ensure that companies can access the funds they need to stabilize operations and support growth at every stage.