ARTICLES ON INTERFACE

Small Business Funding - an Oxymoron?

The main ongoing problem facing the majority of small business owners today is the perennial problem of how to make the cash flow stretch to accommodate the growth plans.

This problem is nothing new, it has been prevalent for a long time and yet there are still only a very few viable financing methods available to correct it.

When we think of finance and capital for expansion, the natural thing is to approach one's bank for assistance. Unfortunately, there remains an on-going reluctance among the banking fraternity to offer loans to small businesses that require $20,000 - $50,000.00.

In the main the reasons seem to be two-fold. Firstly, banks are 'equity' lenders and expect their customers to have established some equity in the form of capital and retained earnings before the bank can accommodate their needs. By it's very nature small business usually is under capitalized. Most of the companies requiring this level of financial help are not likely to have been in business more than two or three years. Therefore, they are at a point in their existence when the business is only just starting to become profitable. Consequently, when the need arises for additional working capital, the customer cannot meet the bank's requirements.

Secondly, for banks to make small business loans they must do so on a profitable basis. Lending $25,000.00 to a small company probably has the same administrative cost to the lender as lending $100,000 - $200,000. It is natural therefore that the lender will chose the larger opportunity as it carries the same administrative cost but yields a higher income for the bank.

Where does this leave small business?

All business people would agree that if their business was 100% "cash on delivery", they would have all the cash they would need to fuel their expansion program. Naturally, business is not so simple. Customers expect terms on their purchases, usually 30 days; which expands to 45-60 days. The problem is then compounded by the reluctance of many businesses to call and ask for payment, even overdue payments. And so a business, to survive, must extend terms and tie up It's valuable working capital in passive accounts receivable.

Entrepreneurs can find relief from this often crippling cycle by utilizing a financial service known as 'Invoice Discounting'. This service immediately turns quality, current accounts receivable into cash for the supplier.

Invoice Discounting is often confused with factoring. However, in a factoring arrangement, the factor normally requires all receivables to be included in the lending arrangement and also requires certain monthly minimum sales requirements. The factor also expects to undertake much or all of the accounts receivable administration work including day to day contact with the customers.

These features are not present in a typical invoice discounting facility. It is a 'use it as you need it' arrangement designed specifically to act as a bridge in meeting the needs of small businesses during their formative period.

From a mechanical point of view, Invoice Discounting is quick and straight forward. There is a minimum of paper work. Typically as an invoice is produced and the goods are shipped, the documentation is purchased by the Invoice Discounter and the Discounter releases cash to the company usually within a matter of hours. The company (the supplier) and the Invoice Discounter work together in terms of the administration and collection of the purchased receivable. This ensures that there is no disruption in the valuable supplier-customer relationship.

This system is both cost effective and very user friendly.

When the bank says NO or NO MORE there is no need to give up - there may be a viable alternative in the form of a professional invoice discounting service.