As factoring companies ramp up business as a result of the current credit climate, one scenario keeps playing out, unfortunately. Factoring companies require a first security position on the accounts receivables they are financing. Pre-existing loans or credit activities that have a secured position on collateral make funding invoices impossible.
Generally the problem stems from an old line of credit, which was used up over an extended period of time. Ideally, a line of credit from a bank should be properly managed and treated like a revolving loan. Money should be taken from the line, but regularly paid back into the line. Having the discipline to borrow and pay back on a line of credit will keep the financial condition of the company sound. This means certain expenditures must wait until profit or other investment is available.
Finally the result of mis-management is a line of credit that is used to the maximum credit limit. What is happening in today’s environment is the bank is unwilling to extend further credit and is changing the structure of the loan into a term loan. This means the total amount is due on a monthly installment payment plan. This leaves the company with their collateral spoken for and no ability to raise additional capital through the use of invoice factoring.