A concrete example is as follows: 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 a current account credit. Primary coverage on the property made this fairly straightforward.
Debtor financing
For the other part, the entrepreneur is asked to raise debtor financing. Of course, the bank's own factoring company is introduced to the entrepreneur. So far, nothing wrong. However, when making such a crucial switch of lender, from bank credit to factoring arrangement, the entrepreneur first wants to properly orient himself on the factoring market and not blindly go for the first offer. 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.
Then comes the catch: tying
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.
Conclusion: for the entrepreneur, this proposal is by no means the most attractive, not least because of its intertwining 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.
Opt for an optimal funding mix
The question now 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? The entrepreneur because he has a total solution within one counter, that of his home bank? 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 financing mix and interests divided among various parties keeps all involved on their toes. The company is more independent and the terms and conditions are more market-based because all individual financing components are structured in such a way that each financing component can easily be swapped for another tomorrow.
Also want to operate more independently from your financier(s) again, or a scan of your current financing mix with possible alternatives identified? Get in touch With Xolv's advisers.
