As Economy Recovers, Small Businesses Use Factoring to Stay Afloat

There are many small businesses nationwide that have been severely damaged by the credit constraints after a year of economic woes. However, while many small businesses have had to close their doors, others have managed to survive using invoice survival tactics such as invoice factoring.

It is definitely too late for all of the United States businesses that have been forced to close their doors over the last year, even though the Obama administration is now planning to assist small businesses in applying for loans. What's more, the U.S. House of Representatives is planning legislation toward increasing the ceiling on federal government loan programs. This commitment to small businesses includes additional loan increases outlined in the House bill; redirecting some of the unspent funds from the Treasury's Troubled Asset Relief Program (TARP).It will also provide capital to regional banks and communities nationwide.

There are an estimated 29.6 million or more small businesses in the U.S: They employ more than half of the country's private sector workforce; and hire 40 percent of high tech workers. This includes about 52 percent home-based businesses and apx. two percent franchises; represents 97.3 percent of exporters of goods and 99.7 percent of all employer firms. It is the small business sector generating a majority of innovation that comes from U.S. companies.

Over the last year, tight credit markets have continued, scores more businesses closed, and now even a fast track plan may be too late to save some small businesses that have been critically damaged by the economy.

In the year 2008, small business openings and closings included:
- 627,200 new businesses, and 595,600 business closures, with more than 43,546 bankruptcies.
- Seven out of 10 new employer firms survive at least two years, and about half survive five years.

These findings do not differ greatly across industry sectors.

There are many businesses that have managed to stay in business and benefit from the working capital garnered from invoice factoring for small business in the face of these credit constraints at mainstream banks.

Factoring is not a loan - it is the purchase of financial assets, or receivables, and it differs from traditional bank loans in that bank loans involve two parties, while factoring involves three parties. Most financial institutions base their decisions on a company's credit worthiness, whereas factoring is based on the value of the receivables.

Accounts receivable factoring benefits businesses that do not get paid for 30 to 60 or 90 days by advancing up to 90 percent against invoices to be paid.

Factoring begins with due diligence that typically takes one to two business days, and after this has been completed the client is at liberty to offer invoices to IFG for purchase. Upon receipt of invoices, IFG checks the credit of the debtor named on the invoice and makes sure that the sale represented has been satisfactorily completed. Once this is done the debtor is advised of the purchase by IFG and the client receives their funding.

Sources: U.S. Small Business Administration Office of Advocacy, September 2009; Survival and Longevity in the Business Employment Dynamics Database, Monthly Labor Review, May 2005. Redefining Business Success: Distinguishing Between Closure and Failure, Small Business Economics, August 2003.