Accounts receivable factoring: A niche C&I lending strategy
The slow growth economy has prompted many financial institutions to shift their loan portfolio from commercial real estate to commercial and industrial loans. However, these institutions face a challenging market landscape, weak loan demand from qualifying borrowers and regulatory scrutiny. To help overcome some of these challenges, Justin Barr, president of BankDATAWORKS.COM, explains in a two-part video series a few lending strategies that some financial institutions are using to increase profitability. In this part, he discusses the Account Receivable Factoring method.
To see the full recorded webinar, visit The New Normal: How to Achieve Profitable C&I Loan Growth in Today’s Economy.
Video Transcription
Factoring is a financing methodology whereby, rather than lending against an accounts receivable (A/R) portfolio with a certain margin, the lender instead purchases the accounts receivable.
Some of the key benefits to the lender:
– Ownership and control over the accounts receivable portfolio and cash.
– Funding decisions predicted on in-depth and real-time verified accounts receivable data. Each individual invoice is ledgered in and tracked by specialized MIS.
– 70-80% of invoices are directly verified by account debtors.
– Lenders are in control of cash flow and the collateral.
– Strong A/R liquidation outcomes due to relationships with individual account debtors, verifications and credit limits.
– Applicable to a significantly underserved market segment with yields significantly in excess of tradition C&I lending.
Key benefits to the borrower:
– Immediate access to greater working capital.
– Faster over-line decisions due to robust, real-time collateral information and insight into operations of borrower.
– Enhanced customer credit information and decision making.
– Enhanced monitoring and collection of A/R portfolio resulting in declination of days sales outstanding.
Asset Based Lending vs. Factoring
Most asset based loans to small and midsize companies should be structured as factoring accommodations. Traditional, company prepared borrowing base certificate data is not real-time and is generally inaccurate.
– If assets of most small to midsize companies were market-to-market, companies would have a negative tangible net worth.
– Current market pricing for bankable ABL deals is not commensurate with risks.
Business-to-business companies that otherwise do not qualify for traditional financing such as early stage companies, companies outgrowing their capital base and companies in a turnaround mode are some of the organizations that can take advantage of factoring. Textiles and manufacturing are the two particular industries that tend to use the factoring method.
Part II will describe SBA 7(a) Loan Program that financial institutions use as a C&I lending strategy.
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