How the Credit Crisis Affects Borrowing for Small Businesses

Small business owners with unproven ventures, bad credit, or even businesses that are tied to a troubled industry such as housing have had a hard time getting credit. These days, most banks are even shy about lending to a healthy business. The bottom line is that the business lending climate is still not positive.On the other hand it is a good reason for small businesses to know and understand the principals of factoring.

Back in 2008, 65 percent of banks during the fourth quarter said they tightened credit for companies with less than $50 million in revenue, according to the Federal Reserve quarterly survey of senior loan officers that year. People who relied on home equity lines as a source of backup income have watched that resource dry up in recent years, due to the value of homes dropping. And, screening to obtain credit is tougher because fewer banks are lending plus they want to see increasingly high credit scores.

In essence, traditional sources of funding are disappearing for most businesses, but factoring remains an option because it is a practice wherein a business sells its accounts receivable invoices to a third party at a discount in exchange for immediate cash. This is how they can finance continued business.

Invoice factoring is a method used by businesses to cover short-term cash needs during periods in which these needs exceed cash flow. As the economy recovers, small business owners still need access to additional funds even while some banks and other lenders slowly relax their borrowing policies. Invoice factoring bypasses these traditional and currently inaccessible methods, allowing healthy businesses to access the cash they’re entitled to from open invoices. There is no complicated application or arbitrary decision made as to whether the business is credit worthy; the more invoices your company factors, the more cash is on hand.

Businesses with poor credit ratings or a history or defaulted payments can take advantage of factoring as well. Banks are unwilling to lend to these types of businesses in the current economic climate, but invoice factoring is dependent on the number of invoices your company chooses to sell. Your current or past financial situation has no bearing on the funds available to you through factoring. Factoring provides immediate access to cash that would otherwise be unavailable to the struggling small business.

Nobody knows how long the recession and tightened credit standards will effect small businesses, however, invoice factoring provides a risk-free funding option.

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