The latest news is that to date, federally backed loans to small businesses in Southern California and across the nation are increasing as more banks participate in federal lending programs. Stepped-up lending through the Small Business Administration (SBA) is finally coming when thousands of small businesses say they are in serious trouble from a lack of funds. It brings up the question - could a 4,000 year old business practice known as invoice factoring help save small businesses?
For many small to medium-sized businesses, the help came too late, so they had to close. The Bureau of Labor statistics and research shows about 4.3 million businesses with 19 or fewer employees closed during the fourth quarter of 2007 through the fourth quarter of 2008. An estimated 627,200 new employer businesses began operations in 2008, while there were about 595,600 companies that closed. According to the Small Business Administration (SBA.) By October of 2009, there were an estimated 90 percent of family owned businesses in the United States from traditional small businesses to a third of Fortune 500 firms.
In February of 2009, the government signed the American Recovery and Reinvestment Act of 2009 in an effort to jumpstart the United States economy and to save millions of jobs. The Act was an extraordinary response to a crisis and it has gone down in history as nothing like it since the Great Depression.
According to the government's SBA and American Recovery Capital Program (ARC), 46,000 total SBA loans, of which 7830 small business ARC loans have been provided across the country since inception. Unfortunately, this represents less than 1 percent of the small business population.
These ARC loans cannot exceed $35,000 and the ARC program is scheduled to end September 30, 2010 or when allocated funds are no longer available. Recipients can only obtain one ARC loan. In a nutshell, loan amounts are limited and the program is due to expire in the near future, then what happens? There is a long way to go for recovery and many businesses are still unable to qualify for SBA and ARC lending.
Factoring can provide both a short term and longer term solution to small business. It is fast and efficient and unlike a loan, it does not appear on the balance sheet. It is a "use it as you need it" service and is not going to expire.
Invoice factoring is basically a “use it as you need it” funding option, therefore every invoice purchase is a separate transaction and does not form part of a portfolio lending approach. The transaction is modeled as a buy-sell transaction. Steps include:
• Due Diligence - Once approached by a prospective client, IFG undertakes a thorough due diligence program that typically takes about 24 to 48 hours.
• Review Invoices–Once the due diligence is completed, the client is at liberty to offer invoices to IFG for purchase.
• Credit Verification–Upon receipt of the invoices, IFG will check the credit of the debtor named on each invoice and make sure the sale represented by each invoice has been satisfactorily complete.
• Debtors’ Notification–Once credit has been verified, each debtor is notified of the purchase by IFG and the client is paid for the invoices.
• Debtor Payments–At the end of the credit period the debtor will make payment directly to the factoring company thus completing the transaction.
This article was added on Wednesday 11 August, 2010.
