One of the most common slogans you’ll see on any factoring company’s website is how they are better than most banks in getting businesses working capital.
Conventional thinking is that banks qualify prospective clients based on the financial stability of the company whereas invoice factoring companies focus more on the credit worthiness of client’s customers. Therefore a prospect with little or no credit or one that has been in business for a short period of time can qualify for a factoring line assuming they have strong customers.
For example, many banks will ask for several years of tax returns, financial statements and sufficient collateral to offset the loan. When dealing with the SBA, new companies will have to submit a business plan and meet other specific underwriting requirements as it relates to the new owners experience in the industry. The entire process from application to the final credit decision can take anywhere from a few weeks to several months.
Although factors like to differentiate themselves from banks there are many ways where the two can meet in the middle to find solutions and provide working capital to businesses.
At our company we are fortunate to have partnered with many well known and local banks that refer business to us and we reciprocate as well.
Although the reasons may vary on why they decline an applicant or cannot extend further credit for an existing client the general focus is the risk factor associated with the business.
For example, we recently funded a long existing customer, with a local bank, that has been in business for over 15 years. The company had a 400k loan with the bank and was expanding rapidly in several new territories. The account debtors were very strong and since the company had been in business for some time, we had a wonderful long account history to verify pay histories with each of their customers.
So why wouldn’t the bank extend credit to such a strong client?
Unfortunately, due to the company’s rapid expansion, the company fell behind on their federal payroll tax payments and a lien was about to be placed upon the businesses assets. Upon receipt of the news, the bank suspended an additional increase to the company’s credit line. After meeting with the bank’s chief credit officer and the company’s president we were determined to find a solution to keep the flow of funds moving. The bank was eager for a solution since they were in a precarious position. They already had a sizable outstanding loan on their books and if the feds were to place a lien against their client they would most likely suspend the current loan and file a demand for payment. This would be a disastrous situation creating a downward spiral for both parties.
We were able to meet with the company’s legal team and advise them how to get a payment plan in place for the overdue taxes. After several weeks of conference calls between attorneys, tax agents and representatives from both the bank and client we were able to get the tax plan in place, file our lien and open the factoring line. As a note, the bank assured us that an approved payment plan would allow them to subordinate the receivables on their UCC-1 filing giving us the green light to open a much needed factoring line with the client. This is a classic example demonstrating that banks and invoice factoring companies can work really well together to find solutions for businesses. It also proves the factor’s due diligence does not rest solely on the approval of the client’s customers.
Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California. Don has over 25 years experience working in the commercial and residential finance industries. He previously served as Controller of a commercial insurance agency and as Chief Financial Officer of a publicly traded mortgage company. He can be reached at 949-305-9300 or don.dambrosio@oxygenfunding.com.