Many small and medium-sized businesses are now employing accounts receivable factoring as an alternative form of financing in 2010. According to a December survey of 700 business owners, 0.51 percent of small businesses have experienced cash flow problems. in the last 90 days. (Source: December Discover Small Business Watch report.) The remaining 45 percent of respondents have not experienced cash flow problems and 4 percent are not sure.

Bank cutbacks on small business lending have forced small businesses to seek alternative means of financing to ensure success in 2010. It’s a credit-strapped economy, and now it’s more important than ever for small and medium-sized businesses to know what forms of financing are available to them. Many recognize how important it is to be able to rely on alternative forms of financing such as factoring to ensure your future success.

A recent Treasury report verified that the nation’s largest banks cut their small business group loan balances by another $1 billion in November. As such, twenty-two banks have cut their small business loan balances by $12.5 billion since last April. Since then, total bank lending has fallen 4.6 percent in that seven-month period, to $256.8 billion.

It seems as if the banks are protecting their balance sheets and not taking on the risk in the form of small business lending. Banks say the reason they are lending less is because small businesses are risky borrowers.

But when sales are slow, the last thing people want or need is debt. Perhaps that is why we have seen several small and medium-sized companies begin to use accounts receivable factoring.

The survey also showed that 35 percent of small business owners rate the current economy as fair, up from 30 percent in November. Sixty-one percent rate it as bad, while 4 percent rate it as good or excellent.

It looks as if overall economic confidence among US small business owners remained strong in December, with fewer of them believing the economy was worsening compared to November. More business owners saw conditions for their own businesses improve over the next six months.

Invoice factoring is simply a form of trade financing or debt financing that has collateral as the basis for borrowing money. Factoring helps small businesses that need funds, since the money received is based on accounts receivable and there are no obligations like there are with loans, whereas loans simply put them into debt. This financing strategy is ideal for businesses with customers who pay between 60 and 90 days, as it takes advantage of small business accounts receivable.

A factoring company arranges to purchase a company’s invoice or invoices, pays immediately, and essentially lends money until the company’s customer’s invoice is paid. They will usually analyze the creditworthiness of the client’s customers and can even finance in as little as 24 hours.

Factoring transactions involve the following three steps:

1) The advance: the percentage of the total amount of the invoice that the company has access to when financing, which is around 80 percent and, depending on the industry, can be as high as 90 percent;
2) A reserve: the remaining funds on the invoice are held and released when the customer pays the invoice; and
3) The discount fee: the fee associated with the transaction that is deducted from the reservation. Depending on how long it takes to receive payment for the invoice, the fee can be anywhere from 2 to 5 percent of the total value of the invoice.

In short, for small businesses to feel more secure through the rest of 2010, cash must be available and flowing. Factoring is a surefire way to keep a business afloat during times of recession.