Traditional Lines of Business Credit are Elusive--Unless You’re Factoring
By SEO Factor
It might just be the worst lending climate in the past two decades. Banks are refusing to renew lines of credit and they’re calling in loans. Decades-old family businesses that are current on payments get no preferential treatment--and new businesses get even less. Those who rely on mortgage financing aren’t doing any better. In fact, thousands of business owners--many of them young and minority entrepreneurs--suddenly have no place to turn for capital. Business lines of credit have been rescinded or refused, leaving businesses without the financing they need to expand or even to remain solvent. Can factoring be the proverbial light at the end of the tunnel?
A “Perfect Storm” of Financial Despair: How We Got into this Mess
A dismal corporate earnings outlook, fears about bank nationalizations, especially Bank of America (BAC) and Citigroup (C), and a warning by Moody's Investors Service of possible downgrades of European banks exposed to the slumping economies of Central and Eastern Europe, stoked investors' fears. The result is an overall tightening of future lending and a halt to business lines of credit. The trickle-down effect is leaving even the strongest companies, who are both current with their payments and have absorbed exorbitant bank fees, hanging out in the lurch. And the scenario just keeps getting worse.
The financial “experts” tell CEOs to prepare because there are still loans and lines of credit out there to be had. They encourage small business owners to actively seek out these financing sources--much easier said than done; market smartly and strategically--often by branching out into unfamiliar niches; smart small and expand later--as if the specter of financing will just reappear; and use technology as an advantage--technology which has never been more expensive. All of these suggestions are good advice in any scenario but this one. Why? Because the purse strings are pulled tighter every day and traditional lenders continue to despair that “there’s just no money to be had.” And they just might be right.
A Business Line of Credit Disguised as Invoice Factoring
As strong businesses continue to go under and lean up-starts are unable to get off the launch pad, factoring companies are screaming for attention. And their messages are starting to be heard. Factoring is a financial transaction in which a business sells its accounts receivable--its invoices--to a third party--called a factor--at a discount in exchange for immediate money with which to finance continued business. If this sounds strangely unlike a loan, that’s because it’s not. There are several unique differences. First, the emphasis is on the value of the receivables--essentially a financial asset--and not the firm’s credit worthiness. Secondly, factoring is not a loan--it is the purchase of a financial asset.
Factors make funds available, even when banks don’t, because factors focus first on the credit worthiness of the debtor, the party who is obligated to pay the invoices for goods or services delivered by the seller. In short, banks look at your ability to pay while factoring companies look at your customers’ ability to pay. As a result, invoice factoring actually creates wealth as opposed to moving it from one coffer to another. Also, because factoring is not lending, there’s no minimum monthly payment, no APR, and no foreclosure in downtimes.
What Makes a Company a Good Candidate for Factoring?
Most factoring companies will consider working with companies that can demonstrate a minimum of $5,000 to $10,000 in accounts receivable for a 30-day period. However, this is not a hard and fast rule. There are some factoring companies that will work with businesses that maintain less than $5,000 in accounts receivable on a monthly basis. In the case of a smaller company looking for factoring services, these companies will usually charge a higher discount rate in exchange for their services.
Top candidates for factoring-driven services include product-based businesses, such as retailers and wholesalers. Other businesses, such as those in service-based industries like employment agencies, cleaning service companies and commercial trucking firms also find that seeking the assistance of factoring services will work in their best interest. Also, the medical and construction fields have the option to solicit specialized factoring services for their unique business models. Business factoring allows high-risk businesses the option of receiving the financial and accounts receivable loans they need.
The Bottom Line--Factor and Grow Healthy
Every minute waiting for a business line of credit is a step closer to insolvency. If financial predictions are any indication, this recession won’t be sorted out until well into 2011, if then. That’s just enough time for an entire generation of solid and up-start business to go under, worsening the situation. On the flip side, invoice factoring is a win-win for everyone. The money is truly there, without the stress and hassles of keeping a minimum balance and making monthly payments or else. It comes down to an age-old business maxim of leveraging all resources available to the company to get through tough times. But the big secret is, through factoring, businesses can actually thrive in any economic condition. And that’s what makes factoring so unique.
To contact the reporter on this story: SEO Factor in New York City at links@platinumfundinggroup.com
Technorati Tags: - business lines of credit, factoring, invoice factoring, factoring companies, purchase order financing, invoice factoring, factoring financing, accounts receivable factoring, venture capital funding, factoring expert
