Small Business and Cash Flow
As if small businesses don’t have enough trouble in this tight economy, in general they also have to wait longer to be reimbursed for their products/services. Ever since the economic downhill slide, large companies have been holding on to money for as long as possible, perhaps to hedge their bets against looming disaster, and the small business operator is the one suffering the consequences in an economy that is definitely difficult, to say the least.
A major repercussion of this practice – aside from the fact that the small business owner is not being reimbursed for his efforts and expenditures in a timely manner – is that he does not have the working capital, operating capital, line of credit or any form of credit line for small business to expand and produce more goods.
Unfortunately this is precisely what the economy doesn’t need! Read any news article and you will see that all the pundits insist that the economy needs to grow by xyz% per year to produce the comeback needed to get back on our financial feet again. It is small business that creates the majority of jobs. Without the financial cushion they need, this won’t happen. They are still operating too close to the financial edge to be able to lay out additional capital for expansion or the purchase of new equipment.
Another problem is having to turn to their vendors and ask for extensions on their end, or extend their credit line. Therefore, some vendors have implement COD or Cash Only sale. Needless to say, this does not do wonders for one’s revenue or profit, which then affects the ability to obtain a business loan. Some lucky small business owners still might have lines of credit that they can fall back on, but in many cases banks have been recalling these and turning them into term loans which have to be paid off by a certain date, not renewing current loans, thus putting yet more stress on the already stressed business owner.
Although banks say they are lending, they are very selective in their choice of whom they lend to (think exceptional credit is just one aspect of it). Based on analysis of data from the FDIC, the average American bank uses only 7.59% of its deposits for making loans to small business. Some of our biggest banks lend the least!
There is some good news though! There are options for the struggling merchant in the form of alternative banking, or alternative funding sources for commercial capital. These companies can provide short-term loans, merchant cash advances, bridge loan, or invoice factoring for those outstanding invoices. For technology or equipment needs there are also equipment leasing and financing that is very viable source of capital. SBA states that over 80% of small businesses lease equipment. Leasing is ideal for depreciating assets.
Keep in mind that most small business owners have options for small business funding, working capital, short term lending, but knowing where to go and who to trust is always important.
Trust and verify is always a good way to know who you will be working with when it comes to alternative commercial funding.