For years I have had to explain to bankers why Factoring was not a last resort option for a business owner, and that sometimes it was the first choice even with the price tag it carried. The basic premise of factoring – cash for invoices now, has a huge advantage for a business owner. If they can turn their money over more cycles in a year, they can make more profit. Now the banks are catching onto the idea that if the bank can turn their money over more cycles in a year, they too can make more profit! Simple and smart.
The American Banker recently posted a well written article about the banking industry looking to expand into factoring. In my opinion, it has always been a safer option for money to the business owner if done correctly. First, there are upfront credit underwriting precautions in place with factoring prior to advancing money. Traditional banks do not currently offer this when making lending decisions on asset based loans and line of credits. Second, there are monitoring facilities in place and credit collection benefits that enhance the turn of the receivables and collectability of the debt. And finally, there is peace of mind knowing the billing is being done accurately and fraud is potentially mitigated within the company level because there is another set of eyes on the books.
But the banks see the dollar signs, not just the safety. When I worked for Private Business Incorporated, based out of Nashville TN, my position was to sell a cash flow program where the bank used its own money and processed the invoices internally, like factoring, but on a 90 day recourse basis. On average, when I annually reported to the president of each individual bank, the small to medium sized banks across the nation banks were increasing fee income by twenty percent! Those numbers are amazing. If the banks can safely train themselves how the factoring companies manage the paper behind the scenes, they can safely expand their fee income and their product offering to clientele.
I am a factor, and although the numbers have doubled in the past years for factoring deals, globally we are the country taking the least advantage of this type of financing. For example, in Commercial Finance, 75% of European loans are factored, in Canada 26% of Commercial Loans are factored, compared to domestically 12% of our commercial loans being factored. Some would say, aren’t you afraid of competition, if more banks are involved in factoring. But, I say there is plenty of room for us all to play in the “sandbox.” Right BOB?
Author – Robinn Mikalic
To read more on the American Banker article click here.