Dylan Morgan, Prairie EVP, right, and Prairie CEO Trevor Morgan, center, discuss growth plans with Eric Withaar of Premium Custom Products.
If you are a small business banker tasked with bringing in new business, find a factor to partner with. Customer loyalty in any business is built by satisfying prospects’ strongest needs when they need it most, and an independent factor can help fill that temporary need until the prospect is bankable.
Nearly every young business is starved for cash, and most are unlikely to qualify for bank financing. Factoring is the purchase of the client’s accounts receivable at a discount; factors are the companies that complete factoring transactions.
Factoring gets cash into the budding entrepreneur’s hands immediately upon sale, which can mean everything to the success of the business. It’s one of the oldest known forms of money lending, with records dating back 3,700 years.
When I was prospecting for small commercial customers as a bank trainee in 1974, I learned an invaluable lesson about what can be gained by timely satisfaction of a prospect’s borrowing needs. I learned the lesson when calling on Frank, the friendly founder and owner of a small screw machine shop.
I managed to get the appointment only because Frank was heading his golf club’s membership committee, and young commercial bankers were prime targets. On that day, though, neither of us was buying from the other. I had to politely decline joining the golf club – though I did join three years later – because that type of bank perk wasn’t offered to newbies like me.
Frank wasn’t buying from me, either. Instead he told me the story of how my bank’s best local competitor had walked into his office 20 years earlier – the day Frank opened his doors – and put together a loan package that Frank desperately needed to seize a profitable sale. Because of that, he said there was absolutely nothing my bank could offer that would get him to move, no matter how our services stacked up, or whether I joined the golf club.
Frank’s experience encapsulated a universal truth about creating a competitive advantage by satisfying a critical need at the right moment. Find the referred prospects with critical cash needs and a way to satisfy them, and they’ll stay at the referring bank forever.
Factors have no magic credit knowledge that enables them to make loans a bank cannot. They simply are able to lend to difficult credits by verifying every invoice they advance on and by taking absolute dominion of collections.
Factoring is more expensive than bank loans, because a factor’s operating expenses are exponentially higher, due to attention paid to the client’s administrative detail. That intense monitoring also imposes good credit, billing and collection habits on the borrower. So when the performance and balance sheets of a factor’s clients pass muster with the bank’s credit standards, the bank can be reasonably certain that the prospect’s administration and reporting abilities are in good order.
Most factoring operations are not bank-affiliated, so they do not compete with the bank for services. Some factors specialize in industries such as trucking, where the customer will remain a borrower of the factor. Others act as bridge lenders, which pertain to the banking community, because they fill a need for sizable working capital when the borrower’s balance sheet won’t satisfy a bank’s credit requirements.
When a factor concentrates on companies with strong gross margins and large immediate growth opportunities, its clients generally level off in their growth, collect their profits, and build their balance sheets well enough to satisfy a bank lender in 12 to 18 months. Graduation rates of factoring clients vary radically, depending on the factor’s approach, so their graduation rate can be a good indicator of your chances of getting your referral back.
If you are a business banker with a need to get a competitive leg up and establish lifelong customers, consider partnering with a factor. Factoring is an effective tool to lend to nearly unbankable companies, and it can increase your chances of banking your “Forever Frank” customers.
- Trevor Morgan, Founder & CEO, Prairie Business Credit
This article was featured in the Hoosier Banker Magazine May/June 2019 issue.
"This article has a lot of great lessons for small business owners. I most appreciated the call to learn to apologize. This seems to apply to so many things both professionally and personally."
- Dylan Morgan, Executive Vice President, Prairie Business Credit
What Others Are Saying About Us
"We were helping to finance an acquisition for my customer. My customer needed a quick turnaround, so our bank called Prairie Business Credit to provide the working capital. This was critical to the acquisition so the customer could hit the ground running, keeping suppliers paid and raw materials readily available.
If we didn't have Prairie Business Credit, my customer would have needed to raise a lot more capital. Prairie Business Credit was very responsive and moved quickly to get the deal done.
Our bank has had a long- term relationship with Prairie Business Credit for over 20 years. They are a trusted and known resource to our bank because they are very bright, responsive and they have the ability to move quickly to fund a deal."
- Vice President Business Banking
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