The use of invoice factoring grows as banks reduce loans to small business
When it comes to obtaining financing quickly when a business is in a cash crunch, it is not hard to see how the big banks won’t be lending a helping hand and a smart alternative will be working with invoice factoring companies.
According to a recent report, the Top 5 big banks in the US hold 40% of all domestic deposits. That’s $2.965 trillion.
Trillions of dollars that could be lent to small businesses. During the Great Recession, many economists pointed out that the banks were not lending money to small businesses, which are the bigger source of employment in an economy and crucial to any recovery.
Because what’s happened with the big banks is that even though they hold 40% of all deposits, they only make 16% of small business loans in the US.
Sixteen percent of all business loans. That’s not much.
Between the lines, what that means is that the big banks are barely lending any money out and if they are, you can be sure they are very, very picky on who they are lending that money to.
If you are a small business with an immediate need for cash, chances are, your business is not going to be on the shortlist for receiving funds from a big bank.
It’s best to accept this fact early on. So when you do need the cash, you have already researched alternative sources of funding. Invoice factoring companies will be one of those alternatives. If a business has done a solid job of working with customers who have a strong credit history and have a solid record of paying their invoices on time, that could be all a receivables factoring company will need.
Because they don’t lend money. So they don’t have extensive requirements like a lender. A receivables factoring company is paying you money, money for your top invoices that are paid on time by your top clients.
With that money an owner can keep a business afloat if they face a cash crisis. Or an entrepreneur can get the capital they need to expand their operation, in which case they may be hiring more employees.
Banks are going to require paperwork and with a big bank, you can imagine how much paperwork that will be. And paperwork causes delays. Decisions that are not made locally can also cause delays.
But with professional invoice factoring companies, those decisions can be made quickly. Many times a business doesn’t have time to wait for a big bank to make a decision.
An invoice factoring company can probably have money deposited in your account while the paperwork at a big bank is just starting to make its rounds with key decision-makers.
So yes, it’s sad big banks are not lending all the trillions they are managing.
But the good part for small business owners is that receivable companies have stepped in to fill that gap. A gap that could mean the life and death of a business or the hiring and firing of an employee.