Asset Based Factoring When Company Has Bank Loan Or Claiming Bankruptcy

Several businesses suffer from setbacks caused by the lack of working capital or cash inflow

. This does not necessarily mean that the business is already doomed to fail; the money problems may only be short-term, caused by delayed payments from its debtors.

This is why asset based factoring continues to become and remains a popular choice. A bank loan is one way to deal with cash dilemmas, but factoring may be the more favorable choice.

There are notable advantages when acquiring asset based factoring services over securing bank loans. It is more difficult to secure a bank loan than to get funding from factors the issue touches on eligibility standards.

One notable standard that banks employ is that they look closely at a clients ratios especially at their asset or cash ratios to their liabilities. The constant ongoing scrutiny is often counter productive and extremely burdensome for growing businesses under pressure to find new customer, continue manufacturing, etc.

All this is in line with the banks engraved philosophy of looking closely at clients financials and their 4 year consecutive history of profitability. Banks will traditionally insist on all taxes having been paid up to date. This includes Source Deductions, GST, PST and as of July 2009 in Canada all HST.

This attitude by a factor is opposite to where the factor offers to call CRA on behalf of the prospect to negotiate a practical settlement. CRA is generally open to suggestions and will always listen to all suggestions concerning payment of arrear taxes.

However, the factor must be satisfied that the prospect will not only be able to make their arrear payments, but that they will be able to remain current and up to date on all future tax obligations.

Banks are keen on the business creditworthiness which may include its tangible assets, history, financial situation, etc. On the other hand, a factoring companys primary standard is the creditworthiness of the business debtors, pointing to the potential debtors capacity to pay.

This means that factoring companies may still consider giving services to businesses with a history of bankruptcy. It can also consider businesses that are behind on taxes, because there are cases where the IRS/CRA will subordinate liens to the factor.

This is similar to a business with an existing bank loan, where liens are filed against the businesss accounts receivables. The client has to inform the factor immediately in order for liens to be subordinated to the factor.

Also, a business undergoing bankruptcy can still be a client; the situation will be assessed on a case-by-case basis. What matters is that it is possible to acquire factoring services even with these scenarios.

Another advantage of factoring over a bank loan is that bank loans may take weeks or months to get approved, while factoring approval may take less than 10 days. Upon approval, funds are sent immediately.

Depending on the agreement, usually 80% of the total amount of a factored invoice will be sent initially while the rest, minus the discount rate or factoring fee, will follow after the debtor has paid the factor.

All in all, if the business is not qualified for a loan and needs money as soon as possible, asset based factoring is what it needs.

by: Tracy Matthewman

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