Factoring May Improve Rating

Factoring might be a way to improve the rating for sub investment grade corporates. Lately there has been a gradual shift by banks to change how they view factoring, or invoice discounting. Previously they regarded the factor to take control over some of the collateral decreasing the security for the other financiers but lately there has been a shift towards regarding the cash generated through factoring as early payments from the customers. This perspective means that the cash flow is improved and therefore the default risk is reduced. Through the grape vine I hear the CRA (Credit Rating Agencies) might even improve the rating dependent on the terms of the factoring program of course. One critical issue is obviously recourse.

Implemented on a broader scale this would mean that factoring companies could substantially increase the amount of available funding for corporates. This does not happen every day and could be a counter action to manage the negative effects of Basel II.