To further Climate First Bank’s objective of creating sustainable banking solutions, the Bank recently expanded its business banking products to include structured finance offerings. Structured finance is an umbrella term used to describe non-standard, complex lending tools. At Climate First Bank, we define it as anything related to specialty finance. In general, structured finance offerings are niche designs of products meant to work with a business in need of capital to provide a solution for complex financial needs. Essentially, it allows a borrower to obtain a line of credit, which would otherwise be impossible through traditional financing.

Our initial focus will be on two structured finance solutions: invoice factoring and asset-based lending.

Factoring is the purchase of a business' invoice to accelerate the cash cycle. Business clients sell their customers’ unpaid invoices to a company or bank that provides factoring as collateral to receive a line of credit. The business' customers pay their invoices directly to the factoring agency rather than to the business. In return, the business can access funding before its customers pay, enabling them to meet payroll, pay vendors and perform other business operations.

Why does this matter? Businesses today typically sell on terms between 30 and 150 days, meaning that after their good or service is provided, their customer has that window of time to pay their invoice. Some businesses, especially those that are small or locally owned, may need more capital to establish an extensive line of credit. They may need funds for operation or development but struggle to get approved for a loan because they lack the collateral or have not been in business long enough. They may, however, have sums of money they are expecting from large, established customers such as Walmart or Costco. Factoring essentially shifts the risk from the business client to that client's customer by providing lines of credit in exchange for invoices. Startups and businesses that cannot otherwise obtain traditional finance benefit most from this process.

Whereas banks look at the credit, profitability and cash flow of the borrowers themselves, factoring divisions assess the credit risk of the client’s customers, allowing them to provide these services. They then verify the delivery of the goods or services to ensure the invoice information is correct. By doing this, the factoring division takes control of the cash. The burden lies with the factoring division to notify the customer directly. They issue a notice of assignment to the customer, stating that the factoring division must be paid directly, rather than the service provider. By regulation and law, the client's customer is then obligated to pay the factoring division directly after being notified. While this is a standard business process, factoring divisions receive occasional pushbacks.

"I think factoring has not done a great job at branding itself over the last 50 years. It is a very common form of financing used by most businesses at one stage in their business or another," Ryan Jaskiewicz, President of Structured Finance at Climate First Bank said. "There are some factoring divisions that do a poor job of managing the client to customer relationship...so that's a little bit of the 'secret sauce' of why Climate First Bank's division and other good factoring companies do so well. It's because we treat that relationship between the client and the client's customer as gold. It is very important to keep that solid."

Factoring agencies can operate either as their own entity or as a bank division, like at Climate First Bank. By operating this way, the factoring division can work closely with other bank divisions to help clients qualify for traditional loan products once they have gained capital. The intent of factoring is for clients to eventually "graduate" from factoring, meaning they have acquired the necessary collateral for opening traditional lines of credit.

Asset-based lending is another form of structured finance offered at Climate First Bank. It is generally used by businesses that do not have the finances to be approved for a traditional bank loan but have assets like receivables, equipment, and inventory, that the company can leverage to obtain the financing they need to run their business. Asset-based lending is a step up from factoring in that, rather than solely using unpaid invoices as collateral, the business is using additional assets to apply for a loan. A key difference is that factoring is not a loan, whereas asset-based lending is. Asset-based lending provides businesses with a more flexible means to acquire a line of credit when they otherwise could not. In asset-based lending, the bank has a stronger monitoring on the business than if they were to take out a traditional loan, which allows the ABL division to provide financing when traditional bank financing wouldn’t.

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Structured finance benefits many industries, such as manufacturing agencies, construction companies, contractors and energy companies. Ryan shared a specific case of a minority-owned engineering firm he had worked with previously. As a small business, this firm needed the cash to pursue its business projects while supporting its company and meeting payroll. This client worked toward mapping electricity grids and engineering power plans for different commercial and residential areas, by staffing engineers who did this work on behalf of the utility provider. Their utilities typically paid invoices on a 60-day basis. However, employees were paid biweekly. To afford to hire engineers and meet payroll, the client needed access to a line of credit, which was only accessible through factoring. At the start of their journey, the client was factoring about $2,000 worth of invoices per month, but less than three years later, they were able to grow their company using their acquired line of credit and were now factoring $2 million monthly in invoices.

By providing multiple structured finance options, Climate First Bank can support various local, minority-led businesses across many industries. To learn more about how your company may benefit from factoring or become a client, contact Ryan Jaskiewicz at ryan.jaskiewicz@climatefirstbank.com.