It is widely acknowledged that the past eighteen months have been one of the most challenging “survival of the fittest” periods in modern history, for factors. Yes, our economy and specifically the commercial finance sector are now budding a few small signs of stability with dashes of optimism. (We are a long way from seeing the frenzy of liberal capital and loose credit which characterized our industry less than five years ago.)
The hibernation of hedge funds, private equity interests and investors is ending as they become hungry for stronger returns. However, coming from a strategy where this community pretty much shut down their money flow altogether—they now want very high returns in exchange for cash and credit lines.
Meanwhile, commercial banks have turned off their lending spigots for small business because of the volatile credit conditions, and the aggressive enforcement oversight by government regulators who prohibit these lenders from any perceived questionable transactions.
At this time, the credit line needs of factors should be one of the best income-earning risks which banks can entertain. Unfortunately, many bankers have a mind-set: They do not lend to finance companies.
When their questions and concerns about this issue are examined, their reasons are often distorted and lacking in fact. Many commercial bankers ask: “Why should our bank give a credit line to a finance company, when we would not make the small business loans being made by the finance company, ourselves?” They argue that the loans often made by the finance company are to “unbankable” business entities. These companies are not strong enough, not old enough, with a problematic track record and worse.
We are not lending solely on historical balance sheets. We are lending mainly based upon collateral which we manage on a daily basis (while most banks only look at financial statements on an annual basis). We also look at a company’s future business based on their orders in the pipeline.
Commercial banks and factors need to find common ground to reach prosperity together. When driving a car, do you spend most of your attention looking in the rear view mirror, looking at where you have been? Or, do you stay focused on the windshield and watch where you are going as you move forward?
If those “unbankable” small businesses have valued collateral, which we as factors and asset-based lenders can control—we are able to provide them money to help these businesses grow.
The lending marketplace has room for both the commercial bank along with factors and asset-based lenders. If a business owner has a strong balance sheet, they are going to seek out a bank because it is cheaper and less work to submit occasional financial statements. If a business owner is undercapitalized yet their company offers a lot of potential, and they want to take advantage of every opportunity which comes along—asset-based lending and factoring is very appropriate.
So long as banks conduct their usual due diligence, they will find that extending credit lines to finance companies is a good quality risk, many times better than their regular lending standards. Most times these loans are diversified, spread out, over different industries, different geographic areas, different customers, different payment schedules, so the finance company is not dependent on any one particular loan, the risk is much less than they would find in one regular business.
Furthermore, the people running these finance companies are often very experienced, very professional in the depth and knowledge of the industries they are financing. They are executives the banks can “talk to” as opposed to many businesses where an owner’s lack of understanding breeds a strained, perhaps, negative relationship.
Another silver lining, for banks giving credit lines to factors and asset-based lenders, is the potential of a finance company to provide mutual referrals. As a business becomes more stable where it progresses into a more attractive prospect for a traditional bank, now the factor or asset-based lender is in an advantageous position to hand off their client to a bank of its choice. There will be strong influence in that decision by the finance company which has helped the business owner.
There are only a small handful of banks which have recognized the vista of lending to finance companies. They have benefited from these relationships for many years.
About the Author:
BY NEVILLE GRUSD, C.P.A., EXECUTIVE VICE PRESIDENT, MERCHANT FACTORS CORPORATION (WWW.MERCHANTFACTORS.COM) WITH OFFICES IN NEW YORK CITY AND LOS ANGELES. MR. GRUSD IS A DIRECTOR AND ACTIVE MEMBER OF THE EXECUTIVE COMMITTEE OF THE COMMERCIAL FINANCE ASSOCIATION (CFA). HE IS A MEMBER OF THE EDITORIAL BOARD FOR THE C.P.A. JOURNAL, THE OFFICIAL PUBLICATION OF THE NEW YORK STATE SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS.