| By :
Kristin Gabriel
Many small to medium-sized businesses are now employing accounts receivable factoring as an alternative form of financing in the year 2010. According to a December survey of 700 business owners, 051 percent of small businesses have experienced cash flow issues in the last 90 days.. (Source: December Discover Small Business Watch Report.) The remaining 45 percent surveyed have not experienced cash flow issues, and 4 percent are not certain. Banks' cuts in small business lending has forvced small businesses to seek alternative means of funding to ensure success in 2010. It is a credit restricted economy, and now more important than ever for small to medium-sized businesses to know what forms of financing are available to them. Many recognizer how important it is to be able rely on alternative forms of financing like factoring to ensure their future success. A recent Treasury report verified the country's largest banks cut their collective small business lending balance by another $1 billion in November. As such, twenty-two banks have cut their small business loan balances $12.5 billion since last April. Since then, the banks' total lending has fallen 4.6 percent in that seven-month period, to $256.8 billion. It appears as if banks are protecting their balance sheets and not taking on the risk in the form of loans to small businesses. Banks are saying the reason they are lending less is because small businesses are risky borrowers. But when sales are slow, the last thing people want, or need, is debt. Perhaps this is why we've seen a number of small to medium-sized companies begin to employ accounts receivable factoring. The survey also showed 35 percent of small business owners rate the current economy as fair, up from 30 percent in November. Sixty one percent rate it as poor, while 4 percent believe it is good or excellent. It appears as if overall economic confidence among small business owners in America held strong in December as fewer of them believed the economy was getting worse compared to November. More business owners saw conditions for their own businesses getting better over the next six months. Invoice factoring is simply a form of commercial financing or debt financing which has collateral as a basis for borrowing money. Factoring aids small businesses as they need funds, since the money received is based on accounts receivables, and there are no obligations like there are with loans, while borrowing simply puts them in debt. This financial strategy is ideal for businesses with customers who pay 60 to 90 days out, as it leverages small businesses accounts receivables. \ A factoring company makes arrangements to purchase a company's invoice, or invoices, pays immediately, and in essence, loans money until the company's customer's invoice is paid. They will typically look at the creditworthiness of the client's customers and can even fund within as little as 24 hours. \ Factoring transactions involve the following three steps:
1) The advance - the percentage of the total amount of the invoice the company has access to when they are funded, which is around 80 percent, and depending on the industry, it can be 90 percent;
2) A reserve - the remaining funds from the invoice are held back and released when the customer pays the invoice; and
3) The discount fee - the fee associated with doing the transaction which gets deducted from the reserve. Based on how long it takes to receive payment of the invoice, the fee can be from 2 to 5 percent of the total value of the invoice. In summary, in order for small businesses to feel more confident the reaminder of 2010, cash must be available and flowing. Factoring is a sure fired way to keep a business afloat during recessionary times.
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