Concrete example
An entrepreneur runs up against his financing ceiling due to the combination of organic growth and an acquisition. Logically, the first port of call is the company's principal banker. The latter responds sympathetically and is willing to meet the financing demand partly with an overdraft. Primary coverage on the property makes this fairly straightforward. For the other part, the entrepreneur is asked to raise debtor financing. Naturally, the bank's own factoring company is introduced to the entrepreneur.
So far, nothing wrong.
With such a crucial switch of lender (from bank credit to factoring arrangement), the entrepreneur naturally wants to have a proper orientation on the factoring market first. The recent past has taught him that shopping at a one-stop-shop While convenience and time-saving, in practice it often costs extra money. Not to mention unwanted dependency.
From several (bank) independent factoring companies, the entrepreneur receives proposals, as well as from the factoring company associated with the house banker. The interest rates of the bank's factoring company are slightly higher, as is the factor commission. In addition, collateral and covenants are tied up with those of the house banker.
The monkey out of the sleeve
For the entrepreneur, these terms are by no means the most attractive. Not least because of the interconnectedness with the bank credit facility. The moment the entrepreneur threatens to opt for another factoring company, the penny drops. The house banker states that it wants to securitise the proposed credit facility only if the entrepreneur opts for the bank's factoring company proposal. Despite the bank's position secured with primary collateral. Tying, in other words. It also strongly advises that subsequent investments should also be placed with the bank's own leasing company.
The question is who actually benefits from such a transaction. The bank because, as long as the business is doing well, it can realise additional customer returns and keep out any competition? Or the entrepreneur because he has a total solution within one counter, namely that of his trusted home bank?
Choose a mix of funders
We believe that in this case, it would have been good to analyse the credit demand with an independent party in a timely manner and arrive at a mix of financiers. An optimal funding mix and interests divided among various parties; that keeps all involved on their toes. The company is more independent. This is one of the reasons why Xolv's customers often separate credit insurance from the factoring company. Moreover, the terms and conditions are more in line with the market, as all individual financing components are structured in such a way that each financing component can easily be swapped for another tomorrow.
Do you want to operate more independently from your funder(s)? Or would you like a scan of your funding mix with possible alternatives identified? Contact the advisers at Xolv.
