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. Fortunately, the latter responds favourably and is willing to meet the financing request partly with an overdraft. Primary coverage on the property made this fairly straightforward. For the other part, the entrepreneur is asked to raise debtor financing. Naturally, the bank's own factoring company will be introduced to the entrepreneur.
So far, nothing wrong.
With such a crucial switch of financier (from bank credit to factoring arrangement), the entrepreneur first wants to get a good orientation on the factoring market. The recent past has taught him that while putting all the balls in one basket brings convenience and saves time, in practice it often costs extra money. Not to mention unwanted dependency.
Proposals are received from several (bank) independent factoring companies, as well as from the factoring company associated with the house banker. Both on terms and conditions, the latter's proposal is not very attractive. Interest rates are slightly higher and so is the factor commission. In addition, collateral and covenants are tied up with those of the house banker.
Then comes the catch...
For the entrepreneur, this proposal is by no means the most attractive. Not least because of its 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 is willing to securitise the proposed credit facility only if the entrepreneur also opts for the bank's factoring company proposal. Despite the bank's position secured with primary collateral. Thus, tying. It is also strongly advised to place subsequent investments with its own leasing company as well.
