Factoring Resurgence

The sometimes maligned "lender of last resort" factoring proposition appears to have obtained new wings with main street banks slowing down on cash flow lending. Even when conditions were more conducive main street banks shied away from the product and instead tried to develop an invoice financing type solution that really did not provide an upside to their client base. The main reason is that banks ask you to pass GO before you are considered an acceptable client. GO refers to client ability to service loans from cash flow, have significant equity in the business and provide security, preferably a mortgage. The flaw with this approach is that a GO client would anyway get more "bang for buck" via a working capital solution that covers stock and debtors, using financial projections to justify incremental funding needs.

Factoring on the other hand gives borrowers many more benefits, not least the ability to access cash flow solutions even for small turnover businesses; something banks cannot replicate due to their high cost relationship models. Although factoring is higher cost it pays for itself by providing capital when needed, grows with turnover, doesn't require robust financials or mortgage security, need not be notified to debtors, outsources a big part of firm MIS, provides debtor risk feedback, is really easy to use with online access and is also available for OZ debtors. Some firms cover export factoring too.

Small wonder that the factoring companies have started to see a flood of enquiries from small firms and (not surprisingly) large companies who are struggling to maintain their cash flow lending packages with main street banks. While some factors have access to bank funding RBNZ would do well to open refinance windows to the real economy by including factored debts (divert some of that RMBS repo funding to the big banks) to provide a fillip to a niche of unsung heroes that preserve the integrity and provide a lifeline to a country of small business owners. They are a big part of what makes New Zealand successful.

http://brotko.com/blog/2008/10/