banking

For any small business owner trying to keep their operation afloat, accounts receivable financing should be thoroughly evaluated as a practical strategy to replace conventional bank business loans. A temptation for borrowers to eliminate options prematurely because they appear to be too costly or complicated is one of the biggest hurdles in this process. It will usually be prudent to keep all workable options on the table because there will not always be be a simple or cheap solution to the commercial finance difficulties for a business. For many businesses, receivables factoring might be the only business financing option that can be successfully arranged. Although receivables financing might be viewed by some commercial borrowers as a “Plan B”, it deserves serious consideration when “Plan A” is bank financing that is often not available in the current commercial lending environment.

The need to find an effective source of working capital loans and other small business finance options to replace bank financing that has already disappeared (or can reasonably be expected to vanish soon) is a harsh but unavoidable reality for most small businesses. Whenever possible businesses should first attempt to accomplish this by reducing their overall commercial debt. When it is not practical to reduce business debt, commercial borrowers should focus on the most realistic alternatives for raising additional capital to maintain cash flow at an acceptable level. Exploring the viability of securing more equity financing is one strategy for accomplishing this goal. In exchange for providing equity capital, this path requires taking on one or more new partners who will then have an ownership interest in the business. But while reducing debt and increasing equity financing can be very effective solutions, these options will not be practical for many business situations.

One of the primary challenges in considering any specialized approach to small business financing is understanding it sufficiently to be comfortable with how it works in practical terms. Among the previous attractions for using a traditional bank business loan was typically a firm belief that this form of commercial financing was straightforward and simple. It is likely that in many circumstances a commercial banker persuaded a business owner that receivables factoring should not be used because it would be too costly or complicated. It will come as no surprise to most when they learn that this was often an attempt to portray potential competition in an unfavorable light by banks. In an ironic twist, it has recently become more clear that the typical bank approach was not so simple after all. Because of obscure recall clauses that allow many banks to cancel commercial loans with little or no advance notice, many small business loans made by banks are now being revoked. With very little warning, business lines of credit are also being eliminated or decreased by a large number of banks.

For any business that has substantial accounts receivable, the use of receivables financing is likely to be on the short list of strategies to improve cash flow and obtain working capital quickly. Receivables factoring is a business financing option that is being reviewed by small business owners as a practical replacement for conventional bank financing. Business borrowers should not ignore the increasing need to replace traditional banks as an ongoing source of small business loans regardless of whether they have a sufficient volume of funds owed to them by customers to qualify for this kind of commercial financing.