To Factor Or Not To Factor

Is Factoring Right For You?

Picture this. You just walked out of a post-covid-19 scenario. You are pondering your financing options. Your export orders are being cancelled by retailers who are trying to preserve cash balance because of an earlier lockdown in the buyer's city due to covid-19. You are encountering all kinds of headwinds obstructing you to progress ahead.

Fasten Your Seat Belt.

Your bank is ultra cautious with a view to lessening their potential loss due to downturn in the global economy with everything coming to a standstill.

How can you survive in this downward economic spiral?

Should I look for alternative source of financing such as factoring companies?

Bear in mind that factoring companies operate differently than your traditional banking partner. You can cherry pick accounts receivable to factor with a factoring company. In other words, you can keep your traditional banking relationship and at the same time explore working with a factoring company. Latter can be your incremental lender when you get new large purchase order assuming your house bank does not have the risk appetite to take on such risk without the extra collateral that you can offer to them.

The financing cost would, no doubt, be higher than your house bank given factoring company does not have the large funding capacity or the deposit base that your house bank have access to.

The disadvantage of working with a factoring company is that they would not support your whole turnover since they would only pick the acceptable accounts receivable from a risk appetite perspective. Hence we are not comparing apples with apples working with a bank versus a factoring company.

The second element for consideration is that banks would ask for collateral in exchange for granting a credit facility such as real estate, cash deposit, corporate or personal guarantee of the largest shareholder and key man's life insurance etc. especially for SMEs whereas factoring companies are typically operating on a non-recourse or limited recourse basis to the borrower. Credit assessment is primarily based on the creditworthiness of the buyers chosen for factoring purposes.

Before you embark on a major face-lifting of your financing options, do reach out to us for a free consultation. Please send us an email and we will get in touch soon.