Even prior to the financial crisis, community banks were disappearing at an alarming rate, as they were bought out by regional money center banks. At first blush, it is difficult to view this as anything beyond capitalism at work. While that is true, it has had a significant, negative impact on small local businesses that depend on local banks for the loans essential to growth and stability. As you will see, this impact extends to the community at large.
The Impact on Businesses
The regional money center banks usually force out the acquired bank’s management; as a result, relationships between bank management and local businesses, developed over several years, are lost. Even if existing personnel are retained, they must follow the policies and procedures of the acquiring bank. Regional money center banks have little incentive to continue relationships with these businesses. Most small businesses contribute too little to the money center banks’ bottom line to be of any consequence. Additionally, small businesses represent a greater risk of default than their larger corporate cousins the money center banks prefer to court. These factors leave small businesses out in the cold in those communities experiencing this all too frequent event.
The Impact on Jobs
Deprived of working capital for day to day operational costs and loans for expansion and growth, businesses in affected communities begin to look for any means available to reduce capital requirements. Unfortunately, the first cutbacks are in staffing. Job loss is the result and this devastates families that are dependent on small business for their livelihoods.
The Impact on Communities
As the financial health of community businesses declines, a domino effect occurs. Lost jobs result in reduced buying power within the community, which places additional economic pressure on businesses as sales decline. Consequently, further jobs are lost and eventually many businesses fail. Small business and those they employ are the major source of tax revenues for the community. As this tax base shrinks, public services must be curtailed. Once again, jobs are lost as local government makes the cuts in fire, police and other services that become necessary due to diminishing tax revenues. Foreclosures, in combination with residents moving out of the community in pursuit of employment opportunities, further erode the community’s revenue stream and ultimately the community is on the verge of becoming another Detroit.
The Role of Factoring
While invoice financing or factoring, an alternative source of financing, cannot halt the advance of the big regional banks, it can make a significant difference in the grim scenario painted above. A business can turn to a factoring firm for an injection of capital. The business can receive cash for its receivables by submitting outstanding invoices to the factoring firm. The factor will advance 80 percent of the face value of the invoices within 48 hours or less. The remaining 20 percent, less the factor’s fee, will be paid to the business when the invoice is paid.
The business need not produce reams of documentation to substantiate creditworthiness. Frankly, the business’ creditworthiness is not in question. Rather, the creditworthiness of the business’ customers is the dominant factor, because this is the source of repayment for the factor’s advance to its client (the business submitting the invoice).
Stopping the Chain Reaction
Factoring is a business to business service capable of stopping that first domino from falling. Factoring can supply the capital a business needs by converting its accounts receivable from a journal entry to cash. If capital remains accessible, business can continue to meet payroll and earn the money necessary for growth. This is the social contribution that factoring offers business in communities with banks that are unresponsive to its needs. Factoring can save these small businesses from capital shortfalls.
When Capital Flows
Business can maintain cash flow by using the services of a factoring firm. This mitigates the need for business to downsize its workforce to stay in the black. With its normal complement of employees, a business can continue to service its clients and maintain a financial equilibrium, without the assistance of traditional bank loans. Jobs are saved and the communities within which they conduct business continue to thrive. The community’s revenue sources remain strong resulting in a thriving community.
For the Want of a Nail
Much like Benjamin Franklin’s preface in the famous Poor Richard’s Almanac, “For want of a nail, the shoe was lost; for want of a shoe the horse was lost; and for want of a horse the rider was lost”—factoring can be the “nail” your business is searching for. By providing business the cash it needs, when it needs it; businesses, jobs and entire communities can be saved. This is why factoring is a powerful force for social good. The benefits of the services a factoring firm provides extends well beyond the business itself, reaching deeply into the very fabric of the community.