Column: Business funding: an alternative

By Pieter Van Tulder

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

The 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 for businesses.

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

In the main, the reasons seem to be twofold.

First, the banks are “equity” lenders and expect their customer to have established some equity in the form of capital and retained earnings before the bank can accommodate their needs. By its very nature, small business usually is undercapitalized. 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.

Second, for banks to make small business loans, they must do so on a profitable basis. Lending $25,000 to a small company probably has the same administrative cost to the lender as lending $100,000 to $200,000. It is natural, therefore, that the lender will choose 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 percent “cash on delivery,” they would have all the cash they need to fuel their expansion program. Business is naturally not so simple.

Customers expect terms on their purchases, usually 30 days; that spreads into 45 to 60 days. That problem is then compounded by the reluctance of many businesses to call and ask for payment, even overdue payments. So for a business to survive, it must extend terms and tie up its 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.

The invoice discounting service 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 includes 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 service. It is a “use-it-as-you-need-it” arrangement designed specifically to act as a bridge in meeting the needs of growing businesses during their formative period.

From a mechanical point of view, invoice discounting is quick and straightforward. There is minimum paperwork. Typically as an invoice is produced and the goods are shipped, then the invoice is purchased by the invoice discounter and the discounter releases cash to the company, usually within a matter of hours. The supplier company and the invoice discounter work together in terms of the administration and collection of the purchased receivable. This ensures there is no disruption in the valuable supplier-customer relationship.

Invoice discounting 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.

Pieter van Tulder is senior partner of The Interface Financial Group in Riverside, a provider of invoice discounting services. He can be reached at 203-424-38349 or by email at pvantulder@interfacefinancial.com.

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