In a previous post, titled, "Is Asset-Based Lending, Accounts Receivable Financing or Factoring right for my company?", we asked the question from the perspective of a borrower.
In this article, we will consider a similar question but from the perspective of a banker: Is Asset-Based Lending, Accounts Receivable Financing or Factoring a good temporary solution for my prospect or customer that is currently not “bankable?”
To begin, it’s probably best to define what we mean by “non-bankable”. In this scenario, we’re referring to a business that does not meet the credit criteria or lending standard of a traditional bank. It doesn’t mean that the bank does not want the company as a customer; however, the bank is simply unable to provide a specific credit solution immediately for that customer.
The increase in banking regulations over the years has made it more difficult for small to medium-sized businesses to secure working capital lines of credit from a traditional bank. There are many reasons that may result in a turndown from the bank including losses, highly levered, insufficient operating trends or inadequate cash flow to service debt, among others.
However, an experienced banker doesn’t just say, “sorry I have to decline your credit request but good luck to you.” A good banker will recognize that although this company is not currently “bankable”, it certainly may be in the near future. By offering an alternative financing solution such as an Asset-Based Lender, the banker will show the customer that they are trying to help even though they cannot do at the bank.
In addition to building goodwill with a company that may become a loan customer in the future, the banker can provide other solutions to the company. For example, the banker may be able to provide deposit services, treasury or merchant services. Many times, it may be easier for the banker to approve a Real Estate or Equipment Loan even though they were unable to approve the revolving line of credit.
We have financed many companies that were able to graduate from Magnolia Financial to a traditional bank line of credit. It’s always interesting that those companies remember the banker(s) who helped find them a solution even though they did not have one at the bank. Not surprisingly, the company calls that banker first when they become “bankable” again.