Small Businesses Can Avoid the Credit Crunch
January 8th 2009 12:32 am
Franklin Roosevelt said that “All we have to fear is fear itself.” Reading today’s newspapers might bring up the comment “all we have to fear is what we read in the paper.” Today’s environment is more difficult than a year ago, but there is financing for small businesses who sell to middle market commercial customers. Factors look at the credit quality of the customers more than they look at the credit quality of their client. This is especially true for spot factors, or invoice discounters, that deal with small businesses. They have developed other risk management techniques that allow them to finance small, new businesses, businesses with uneven earnings history, for example.
Here’s a story of a small business that needed funding. They make sport bags. They manufacture here in the western U.S. They have created a niche, not by being the cheapest, but by being creative, by being able to do small runs, and by have very short delivery times. They just got a big order from one of the national sports leagues. But they don’t have the money to purchase the raw materials to manufacture the bags. They have been in business for many years, but they don’t qualify for bank financing because their earnings history is uneven. But they do have receivables from other credit worthy customers, like major sports equipment manufacturers. They can’t wait to be paid on the outstanding invoices before they need to purchase material to fill the new order. This is a perfect case for invoice discounting/spot factoring. They can sell the invoices that they are waiting to be paid on and use that money to start filling the new order. The set up takes about 48 hours; they don’t have a commitment to sell any more invoices unless they want to.
