You May Not Have Considered
By Tracy Eden
past couple of years, the term “credit crunch” has taken its place
in the popular vernacular alongside other now-common phrases like
“mortgage meltdown” and “bank bailout.” But is the supposed
credit crunch that we keep hearing so much about (go ahead and
Google it—I did and got more than 12 million results!) real? While
most of the media would have us believe it is, from my perspective,
I’m not so sure.
Jim Blasingame, the creator and host of The Small Business Advocate
Show, the world’s only weekday small business radio program. When I
appeared on Jim’s show recently, this is what he had to say about
it: “The premise that there’s no money available for small
businesses to borrow is a flat-out myth. Sure, lending standards may
have tightened, but there are institutions out there eager to lend
money to small businesses that qualify.”
community banks are in better financial condition than big banks, so
these are often a good place for small businesses to start their
search for financing. Keep in mind, however, that it takes more work
and diligence on the part of small business owners today to obtain
and maintain a lending relationship. Lenders require much more
control and monitoring of recordkeeping, reporting, expenses and
Beyond Bank Loans:
In addition to traditional bank loans, Jim and I talked about
alternative forms of financing for companies that might not qualify
for loans in today’s more stringent credit environment. One of these
is very different from a bank loan. In fact, it isn’t really a loan
at all; rather it’s a transaction: the purchase of receivables by a
bank or finance company for a fee. While some banks offer factoring
services, most don’t. Commercial finance companies (often called
“factors”) are the most common source of this type of financing.
it works: The factor will advance a portion of the receivable to the
business when it buys the receivable—typically 80 percent—and hold
back the rest as a reserve until the money is collected. Upon
collection, the factor will deduct its fee and then forward the
remaining amount to the business. Factoring fees typically range
from 2-5 percent of the total invoice amount.
factor’s payment is contingent on collection of the receivable,
factors are extremely diligent when it comes to checking and
monitoring the creditworthiness of their clients’ customers. In
fact, this is one of the biggest benefits of factoring: In effect,
you are outsourcing the credit and collection functions of your
business to a partner that specializes in these tasks.
is like bringing a financial partner into your business,” Blasingame
added. “The factor drops into the middle of the transaction and
gives you cash for your outstanding receivables. It can be a good
way to capitalize your business if you don’t qualify for a bank
Benefits of Factoring:
There are a number of reasons why you might want to
consider factoring as a strategy for capitalizing your business:
Improved cash flow.
This is the primary benefit of factoring, especially for companies
in industries where suppliers are slow to pay invoices. Some
companies can’t afford to wait 60 to 90 days or longer to collect
accounts receivable—they’ll literally run out of cash during this
time. With factoring, you’ll receive up to 80 percent of the
receivable right away, virtually eliminating cash flow lags.
Avoidance of additional debt.
Since factoring isn’t a loan, it won’t add to your company’s
leverage or have an adverse impact on your balance sheet. Nor will
it tie up collateral that may be required in order to secure bank
Outsourcing of credit analysis and collections to experts. Many companies spend untold hours doing customer credit
checks and chasing after past-due accounts receivable. A factor will
become your de facto credit and collections department, taking over
all accounts receivable management and collections functions.
includes thoroughly vetting the creditworthiness of all of your
customers, utilizing specialized computer databases, and taking over
all collections efforts. The factor will analyze credit reports,
uncover bad credit risks and set appropriate credit limits, which
will minimize payment problems and help you build a roster of
strong, creditworthy customers over time.
Inability to qualify for a bank loan.
As noted above, if you don’t qualify right now for bank financing,
factoring may be a viable alternative that allows you to obtain the
financing you need to complete your cash flow cycle and continue
growing your business.
companies, factoring is a temporary financing solution that lasts
from 12 to 18 months until their balance sheets improve to the point
that they can qualify for a bank loan or line of credit. However,
some industries use factoring on a more permanent basis, including
apparel and carpet manufacturers and furniture manufacturers and
“Undercapitalized” Small Business?
“It’s redundant to
use the term ‘undercapitalized small business,’” Blasingame said
during our interview. “There’s never a time when a small business
owner has an extra buck lying around and can’t find somewhere to put
especially in today’s challenging economic environment where cash
flow at many companies has slowed to a trickle. If your business
needs a capital infusion but you’ve been scared off from seeking
financing by all the talk of the supposed credit crunch, don’t
despair. There may be options available to you after all.
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