Mood:  a-ok

by Keith Mabe

As the economy slowly recovers, large companies continue to shore up their cash flow constraints by delaying payments to small business suppliers. At the same time, vendors to these same small businesses continue to demand faster payment. The result is putting small businesses out of business.

 This strong-arm tactic by larger companies is squeezing the small supplier’s cash flow. Since small businesses have little bargaining power when dealing with their larger customers, they are often forced to accept more lengthy terms. This problem comes on the heels of another: Vendors (many in a cash-crunch themselves) are demanding prompt if not faster payments. This is creating a vicious cash-flow crunch cycle from customer to supplier to vendor, pushing many small businesses to the breaking point.

Making matters worse, in a credit clampdown that went too far, bank lending to small and mid-sized businesses has continued to dwindle. The SBA’s own data states that from June 2009 to June 2010, the value of outstanding loans to U.S. small businesses plunged $43 billion, a drop of more than 6 percent. This lack of lending has had a devastating impact on small businesses that were already strapped for cash, putting many of them out of business.

As business owners are continuing to struggle with cash flow during this economic recovery, financial relief seems to be scarce. However, Accounts Receivable Factoring is an often overlooked choice to help businesses manage their cash flow. This form of financing (also known as Invoice Factoring) is a financial tool that allows businesses to capitalize on the power of their outstanding Accounts Receivable. Factoring is a valuable mechanism to turn a business’ invoices into immediate cash, enabling them to fund business operations.

Although not widely understood, a factoring firm provides funds to a business based upon its Accounts Receivable. Most invoices billed to credit worthy customers can qualify. Banks, on the other hand, must consider increasingly stringent criteria before qualifying a borrower for any type of funding. In most cases, when considering assisting a business based strictly upon its accounts receivable, factoring companies can provide funds when a commercial bank cannot.

The reason many businesses employ factoring is to ensure the continuous flow of cash to the business without sacrificing equity or incurring debt. Essentially, businesses that use factoring are focusing on having most of the money now rather than all of it later. It can take time to collect an invoice, but when companies factor their accounts receivable, they get their money faster and easily are able to avoid the cash-crunch.

Mood:  a-ok

by Keith mabe

According to The National Bureau of Economic Research (NBER) the Great Recession ended in June 2009, but does that mean “back to business as usual”?

The recession that began in December 2007 and lasted 18 months is the longest and deepest downturn for the U.S. economy since the Great Depression. Fears of a double-dip recession are still alive, especially when unemployment remains high and the housing market continues to be in a slump. Why does there seem to be a huge gap between what the NBER offers and what seems apparent today?

Perhaps this question has already been answered, but no one was listening. Robert Pollin, an economics professor at University of Massachusetts-Amherst states, “The single most important reason for the failure of the recovery to take hold thus far is that private credit markets are locked up, especially for small businesses.” The reality for many small businesses that may have qualified for credit under the old norm is that they do not qualify for credit under the new norm.

We pointed out this paradox in our own August 27th article “$40B in Small Biz Loans Disappears”. How can the recovery be sustained if small businesses cannot access the working capital needed to support renewed growth? Small business is the life-blood of a strong economy. So as long as small business is challenged by access to working capital, then we can expect a challenging economic recovery as well as a hindered job market growth.

It is critical that businesses acquire a funding source that is readily available and dependable. Factoring (also known as Accounts Receivable Financing) is an often overlooked choice for businesses trying to participate in the recovery. This form of financing is not widely known, but allows businesses to capitalize on the power of their outstanding invoices. Factoring can be a valuable mechanism to turn business invoices into immediate cash, enabling them to fund business operations.

Funds obtained from a factoring provider can be used for the same business purposes that one might use cash borrowed from a traditional business lender such as a commercial bank. Instead of incurring debt by borrowing from a traditional lender, business accounts receivable can be converted immediately to cash under a factoring arrangement, essentially, leaving the business debt free. In many cases, under an inter-creditor agreement, a factoring provider can provide funds to a business already indebted to a commercial lender.

Factoring allows the small business owner to retain control of their company and gives them the ability to grow quickly or at a moderate pace. It is all about control and cash flow management. Savvy business owners use the extra cash to take quick-pay discounts from suppliers by paying early. With the right financial strategy, factoring can also provide long term cash flow management, not just a quick fix.

Factoring has become an important small business financial tool in the midst of this uncertain economic environment, as it has proven to be a cost effective alternative for working capital to fuel business growth and to timely pay sensitive cash obligations.

by Keith Mabe

According to bank reports recently submitted to the Federal Financial Institutions Examination Council, in the last two years, $40 billion worth of small business bank loans has disappeared.

At a time when small businesses are struggling with cash flow, access to funding has become more challenging. At the “Addressing the Financial Needs of Small Businesses” forum in July, Federal Reserve Chairman Ben Bernanke explained that a weaker demand for financing from small businesses (who are worried about taking on additional debt during tough economic times) and a dwindling supply of available credit have contributed to the decrease in access to bank financing.

The whole situation puts banks in a precarious position: On the one hand, bank regulators are telling banks to tighten lending standards, while on the other hand banks are being told to increase their small businesses lending. Invariably, if businesses need financing for growth, there are increasingly fewer conventional sources available today. Challenges from slow accounts receivable cycle or recovering from unforeseen circumstances can put a business in a serious cash crunch quickly. Fortunately, there are alternative providers of working capital funds, such as commercial finance companies that specialize in factoring or funding business accounts receivable.

Cash obtained from a factoring provider can be used for the same business purposes that one might use cash borrowed from a traditional business lender such as a commercial bank. As opposed to incurring a debt by borrowing from a traditional lender, ones business accounts receivable can be converted immediately to cash under a factoring arrangement, essentially, leaving the business debt free. In many cases, under an intercreditor agreement, a factoring provider can provide funds to a business already indebted to a commercial lender.

Factoring has become even more prevalently used in the midst of this uncertain financial environment, as it has proven to be a cost effective alternative for working capital to fuel business growth and timely pay sensitive cash obligations.