Articles by Sheila and Chris Hussey

Invoice Discounting: an Alternate Source of Small Business Funding

Tuesday, November 23rd, 2010

One of the main problems facing small business owners today is the ongoing issue of how to make cash flow stretch to accommodate their growth plans.

Their problem is not new. It has been prevalent for a long time and yet there are still only a few viable financing methods available for small businesses.  When the need for capital arises, the first thought is to approach a bank for assistance. A bank can provide a term loan, a line of credit or perhaps an SBA loan. Unfortunately, there seems to be reluctance among the banks to offer loans to small businesses in the $25,000 to $50,000 amount range.

The reasons for this reluctance seem to be two-fold. First, banks are ‘equity’ lenders. They expect their customers to have established equity in the form of capital and retained earnings before the bank can accommodate their needs. Small businesses are typically under-capitalized, and many have been in business for less than three years. They are just at a point in their existence where the business is starting to become profitable. Consequently, when the need arises for additional working capital, the customer cannot meet the bank’s balance sheet requirements.

Secondly, for banks to make small business loans they must do so on a profitable basis. Lending $25,000 to a small company has approximately the same administrative cost to the lender as lending $100,000 – $200,000. It is natural that the lender will choose the larger opportunity, as it carries the similar administrative cost but yields a higher return.

Where does this leave small business?  
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