To Factor Or Not To Factor
Alan K.L. Wong
Trade Finance Transformation Leader. Global Exposure with Top Global Banks. Speaker. Blogger.
Picture this. You just walked out of a post-covid-19 scenario. Attached picture from the movie Blade Runner 2049 perhaps might project a shocked and awed image from the perspective of an SME. You are pondering your financing options. Your export orders are being cancelled by retailers who are trying to preserve cash 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.
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 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 to the following email address and we will get in touch soon：
#ToFactorOrNotToFactor #AlternativeFinancingOptions #SMEs #COVID-19 #WeStriveToBeTheMckinseyOfTradeFinance
Impactful support for growing Businesses
4 年Factoring companies have a role to play on account of their speed and flexibility, however for my company usually I would look for a partner who could gradually move from purely post shipment to a mix of pre and post shipment. Thats a big gap currently with most factoring companies and can be a competition risk for them considering many banks also do export bill discounting.
Banking Services
4 年Nicely described Alan. Every product be it? for Investment or for lending has a purpose. As factoring cos does not support entire topline being limited funds to do so, banks have large funds cache but they act as a custodian and accountable for those funds that the funds should not be used or invested in a asset where recovery is in peril or doubtful.? Risk aversion element is available in both the cases. To undertake a transaction entirely depend on the risk appetite, larger the funds access, higher the risk appetite. In every case both the funding types? are useful and suitable for the businesses.