Alternative financing is a rapidly growing source of money for established businesses and startups. Large money center banks have been gobbling up community banks that small business has long depended on for loans to sustain operations and growth. However, the large money center banks have almost no interest in small business and little appetite for the risks inherent in startups. As a result, business, include startups, have increasingly turned to alternative sources for the capital they need to survive and thrive.
The phrase alternative financing embraces the broad array of resources that businesses use to source capital. These alternative financing sources include government programs, such as SBA loans, grants and loan guarantees. Other alternative financing may take the form of a stock offering, loans from family and friends and more recently—crowdsourcing. This is not an exhaustive list. There are several other alternative financing strategies.
The comparative merits of these are debatable. For example, government sourced financing is fraught with red-tape, restrictions, bureaucratic hurdles and uncertain outcomes. Stock offerings, may raise capital, but the resulting dilution of the owner’s interest in the business is a huge drawback for many entrepreneurs. Furthermore, not all businesses are incorporated, leaving proprietorships and partnerships in the lurch. Loans from friends and family put relationships and friendships at risk. Most business owners are uncomfortable at best with this alternative. Crowdsourcing is the new kid on the block. It has potential, to be sure, but as yet the Security and Exchange Commission’s proposed rules remains unapproved and far from finalized. Consequently, precious few business owners are willing to play the pioneer in this brave new world.
Growth and day-to-day operations require capital. Venture capital has many of the same drawbacks inherent in a stock offering, lines of credit and working capital loans are becoming harder to find than hair on a frog. What is a business to do?
Not so long ago, business was joined at the hip with its bank. After the financial crisis, the banking community basically turned its back on the small business owner. Small community banks were falling prey to regional money center banks. When the large regional banks took over these small local banks, the businesses they once served lost relationships that had worked diligently to develop over several years. Add to that loss, the fact that the new owners (regional money center banks) had little or no interest in lending to the small businesses in the community. There was just no money in it!
Deprived of working capital and the money necessary to grow their businesses, many have gone belly-up, exacerbating the already dismal economy. However, a few sharp business owners, pursuing other avenues to raise capital, discovered invoice financing. Discovered, is a strange choice of words for a business to business service that has been in play for more than four-hundred years, but there is no other way to describe it, except maybe to say, re-discovered.
Before continuing, let’s take a moment to define invoice financing because… there are business owners that have yet to re-discover this exceptional resource. Invoice financing is the broader term for two subsets of services. They are: 1) invoice factoring and 2) invoice discounting. There is an excellent blog post that covers virtually every aspect of the subject and rather than paraphrasing the post here, I urge you to read “A Definitive Guide to Invoice Financing for Small Businesses”.
A Perfect Storm
The convergence of the financial crisis, tightening credit markets and the demise of the local bank have created a shortage in capital for the small to medium business community that is perfectly addressed by the invoice finance industry. Another, less well-known issue, has been the impact of the Patient Protection and Affordable Care Act, affectionately known as Obamacare, on health care providers. The financial uncertainties raised by the act have had a negative impact on cash flow in this sector. As a result, many in the health care industry have turned to invoice financing to meet capital requirements.
This perfect storm has been a boon to invoice finance providers and growth in demand is unprecedented in recent times.
Growth Is Good
Growth in any business is a positive event. However, with growth, there can also be growing pains. As new companies blossom and compete for customers, businesses and business owners need to exercise more than the usual amount of caution.
Competition is ultimately is a positive event for customers, reducing costs and improving service levels. However, the initial explosion of competition creates a buyer beware environment for prospective clients. Separating the wheat from the chaff is the responsibility of the businesses seeking the services of a factoring firm. Companies like CBAC Funding provide a platform conducive to bringing prospective clients in contact with the right company to meet their unique needs.
Across the Pond
In the UK, where banks have had a long-standing tradition of tight-fistedness with small business, it is reported than one in five companies use the services of a factoring firm.
Economic trends in the US have all but guaranteed a bright future for American invoice finance firms. If your business hasn’t considered the benefits of invoice financing or just wants to learn more about the process, you will find all the resources you need right here.