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.
May 23, 2011 at 3:28 am |
I really enjoyed this article. Thanks for the info! Which do you think businesses will favor: factoring or purchase order financing?
May 23, 2011 at 7:30 am |
Since many commercial businesses do not operate using purchase orders, factoring is more inclusive of most small to mid-sized businesses.
May 25, 2011 at 2:47 pm |
Thanks for the useful info. Great article.
Richard,
small business invoice
August 3, 2011 at 1:17 pm |
We think that factoring invoices should be done in great economic times and even more so in rough economic times. Companies with longer time frames from when items are billed and when the receivables are received need cash to pay for important things like employees. This need for cash now is even more important in rough economic times because there is most likely less cash reserves to draw from. Factoring is not recession proof in the sense that you can always get $400,000 right away but that you can factor the invoices you do have to insure at least some of the costs are covered.
At Factor Finders we offer great rates, no long term contracts, and excellent personal service specific to your industries’ needs. Visit our website (www.factorfinders.com) for more information.