Small business ideas for financing during a credit crunch

 

As a small business owner, I feel the pain of the credit crunch caused by the recession. Despite great credit, my company has lost financing options; they have either dried up or become much more expensive.  First, American Express decommissioned my company’s business line.  Second, Capitol One increased my company’s credit card interest rate by seven points. Third, Chase recently sent a letter notifying me that it, too, may decommission my company’s business line and raise minimum payments.  Considering these circumstances, it is increasingly challenging to operate a business, let alone grow. 

As a result of traditional banks refusing to lend, more small businesses are seeking alternative sources of funding.  Two reasonable options are accounts receivable financing and purchase-order financing. 

First, accounts receivable financing helps to speed up your DSO (Days Sales Outstanding) and to improve cash flow.  As defined by About.com, accounts receivable financing is “the selling of outstanding invoices or receivables at a discount to a finance or factoring company that assumes the risk on the receivables and provides quick cash to your business.”  In my opinion, it operates like a payroll advance with fewer options.  It also carries the same predatory stigma.  Interest rates can range from as low as 0.5 percent to as high as 3 percent. 

Second, purchase-order financing is an option for businesses that sell goods.  A twist on accounts receivable financing, purchase-order financing refers to an agreement in which money is advanced against a purchase order for finished goods or value added products to finance the manufacturing of the item.  The transaction is closed out after the goods are shipped, the customer is billed, and the factoring company buys the invoice.  Recently, The New York Times published an article that explores purchase-order financing.  The story, entitled “Spurned by Big Banks, Small Firms Find Cash Where They Can", follows Media Street Group’s journey to find funding. The company, denied by several large banks, eventually finds a small lender that specializes in purchase-order-financing.  As described in the article, lenders can charge “typically 3.5 percent for the first 30 days, and 1.25 percent for every 10 days after that, an annualized percentage northing of 40 percent.”

In short, accounts receivable financing and purchase-order financing are two options will help small business owners like me rest a little better at night.  Even though small businesses end up paying higher interest rates and subjecting themselves to loan-shark-like terms, the only other choice is to shut down shop. As the business owner in The New York Times article put it: “Nothing from nothing is nothing.” 

Comments

[Loans @ BCA with Martin]

Excellent article, great info. Loans are often a confusing topic for inexperienced individuals and business owners who do not understand the various intricacies of the various types of loans. And for those who have bad credit, they often think there are no options for them when, in actuality, there are.

Crowd Funding seems to be picking up traction over the last year as well as other creative initiatives. Just read an article about how a woman financed her business with cheese...yes cheese! She gave her subscribers a 5 year cheese delivery valued at $150/year and raised almost 4k. Now that's creativity.

[Invoice Factoring]

I dont know for you guys, but i run a small house interior refurbishment company and i found that invoice factoring was of massive help, specially when i started about one year ago. It can make a lot of sense for small businesses...

[Kevin D. Johnson]

Thanks, Gary, for the comment. I am glad I could help.

[Gary Barzel]

Great post! Many businesses, especially the small businesses are feeling the side affects for the "credit crunch". So many have depended on credit and now, as it was said, are paying for that now. I preach all the time that it's much better to go with unsecured business loans then to go with traditional bank loans. There is less risk, hassle and headache involved, and you don't have to worry about having the credit or not. Thanks for sharing a great read!

[Kevin D. Johnson]

Jefferey, I think we all have learned a lesson or two that will change how we conduct business and our personal lives. Too much leverage, means too risk. Too many of us are paying for that huge gamble now.

[Jeffrey Johnson]

I refuse to use credit in my operation of 4 business I own. Yes things would be easier if was not stubborn but look all business going bankrupt as they used way to much credit in good times and now can not pay it as comes due. Chick-fil-a is about to stop using credit to fund their business. Now if the business would stop asking me if want to apply for their pay for stuff for next 30 year store charge accounts I be happy. I do not want to be paying for pizza I eat for 30 years.