The Small Business Cash-Crunch: How To Find Alternative Financing After The Bank Says “No”

There’s finally some life to the economy. The stock market is up dramatically. The unemployment rate is slowly dropping. Consumers are cautiously opening their wallets. Businesses are starting to rebound.

Life is good again for small business, the backbone of the economy, right?  Well, not quite.

Despite the desire, banks are having a difficult time finding creditworthy small businesses for loans. They are turning away small firms that desperately need cash to take advantage of the rebound and continue to fuel the recovery. In addition, many of the small businesses that were born during the Great Recession are ready to grow, but because the firms are so new they don’t meet the strict lending criteria banks have adopted. No new employees. No new inventory

How it Works

Think of it this way. The traditional banking approach to small business maintains if you want financing, the following criteria must be met: be in business for two to three years, be profitable and have an accepted business model. That helps make the banks secure, after all you can’t lose money on a loan that isn’t made. But with government statistics showing one in four new jobs will be created by companies that are in business for less than two year, the nation’s recovery depends on small businesses getting loans. Right now, thousands of small businesses are looking for loans in the $30,000-$100,000 range but don’t yet qualify. I tell business owners who are desperate for cash to look into invoice discounting as another way forward.

Invoice discounting firms purchase a percentage of their clients’ verified receivables and provide them with access to instant capital. Businesses usually have cash in hand within 2-4 business days. Once the invoice is paid by the client’s customer to the invoice discounting firm the transaction is completed. This form of short-term financing offers small business owners the opportunity to access cash quickly without having to wait for their outstanding invoices to be paid.

Invoice discounting is hugely popular among countries in the European Union and is a regular practice with large enterprises in the United States. It is gaining traction amongst small businesses in the US because it is flexible; it can be used as needed.

I find small business owners are attracted to this model because they can get access to cash quickly and the commitment isn’t permanent. Every business dealing is transactional, not a revolving loan, so the process can be repeated as frequently or infrequently as the business owner needs.”

 My company, the Interface Financial Group, has been established for 39 years and is consistently ranked one of the top franchises among Entrepreneur magazine. We have 150 franchises in seven countries, which specialize in an invoice discounting service for small business.  Our franchises report an increase in inquiries from small businesses who are looking for cash to expand their firms.

The State of Small Business in the United States:

  • Small firms accounted for 65 per cent (or 9.8 million) of the 15 million net new jobs created between 1993 and 2009. Much of the job growth is from fast-growing high-impact firms, which represents about 5-6 per cent of all firms and are on average 25 years old. – Source: U.S. Dept. of labour, Bureau of labour Statistics, Business Employment Dynamics; Advocacy-funded research by Zoltan Acs, William Parsons and Spencer Tracy, 2008
  • Small businesses rely heavily upon owner investment and bank credit, averaging about $80,000 a year for young firms. Startups rely about equally on owners’ cash injections into the business and bank credit; young firms receive about three-quarters of their funds from banks via loans, credit cards, and lines of credit. One-tenth of startups and about a third of young firms do not use capital injections. – Source: Kauffman Foundation, An Overview of the Kauffman Firm Survey: Results from the 2004–2008 Data, (Alicia Robb, E.J. Reedy, Janice Ballou, David DesRoches, Frank Potter, Zhanyun Zhao), May 2010.

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