STRATEGIC PARTNER FEATURE:
By: Sheila and Chris Hussey with Interface Financial
One of the main problems facing small business owners today is the ongoing issue of how to make cash flow stretch to accommodate their growth plans.
Their problem is not new. It has been prevalent for a long time and yet there are still only a few viable financing methods available for small businesses.
When the need for capital arises, the first thought is to approach a bank for assistance. A bank can provide a term loan, a line of credit or perhaps an SBA loan. Unfortunately, there seems to be reluctance among the banks to offer loans to small businesses in the $25,000 to $50,000 amount range.
The reasons for this reluctance seem to be two-fold. First, banks are ‘equity’ lenders. They expect their customers to have established equity in the form of capital and retained earnings before the bank can accommodate their needs. Small businesses are typically under capitalized, and many have been in business for less than three years. They are just at a point in their existence where the business is starting to become profitable. Consequently, when the need arises for additional working capital, the customer cannot meet the bank’s balance sheet requirements.
Secondly, for banks to make small business loans they must do so on a profitable basis. Lending $25,000 to a small company has approximately the same administrative cost to the lender as lending $100,000 – $200,000. It is natural that the lender will choose the larger opportunity, as it carries the similar administrative cost but yields a higher return.
Where does this leave your small business?
Most business owners would agree that if their business were 100% ‘Cash on Delivery’, they would have cash to fuel their growth plans. Unfortunately, today’s business market is not that simple. Customers expect terms on their purchases, usually 30 days, which can grow to 45-60 days. The problem is then compounded by the reluctance of many businesses to ask for payment, even overdue payments, so as not to jeopardize the relationship with the customer. So for a business to survive, it must extend terms and tie up 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. It leverages the company’s assets now to get cash for growth.
Invoice Discounting is sometimes confused with factoring. However, in a factoring arrangement, the factor normally requires all receivables to be included in the lending arrangement and also requires monthly minimum sales requirements. The factor expects to undertake 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 practical point of view, Invoice Discounting is quick and straightforward. There is a minimum of paper work. When the goods are shipped and an invoice is generated, the Invoice Discounter purchases the invoice and 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 fast, 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.
Sheila and Chris Hussey are the owners of The Interface Financial Group based in Batesville, IN. The Interface Financial Group provides Invoice Discounting to local small business. To find out more about Invoice Discounting, please contact Sheila or Chris at (812) 212-9850 or e-mail them at chrisjhussey@interfacefinancial.com.
