Archive for: May 2010

The Obama administration has come up with a new initiative to help small businesses. Details of this plan can be found here. The goal of this initiative is to increase access to capital through tax breaks on small businesses investments and lending incentives to smaller community banks which should lead to job creation. Here is a break down of the initiative.

To increase small businesses access to loans a $30 billion “Small Business Lending Fund” (SBLF) will be created. Access to this fund will be limited to banks with less then $1 billion in assets as to target smaller community banks that are a staple of small businesses lending. The funds will given to banks with a sliding scale interest rate that gets lower as small business lending is increased compared to previous years. For example, if a bank were to increase their small business lending 10% or more compared to 2009 numbers, the rate they would pay for the SBLF funds would be 1%; if small business lending stayed the level the rate would be 9%.

Trust is a key component of any lending arrangement. The lender needs to have trust that the borrower will pay them back. The borrower needs to have trust that they are getting a fair deal that is in the best interest of their company; not a deal that only suits the lender.

However business owners can be desperate for money, and there are profiteer’s looking to capitalize on this desperation. The Wall Street Journal wrote and article about such a man by the name of Surinder Multani.. This loan broker charged steep fees to small businesses owners on the basis that he could secure a SBA loan for them. He did deliver on this promise, brokering almost fifty deals totaling $44.3 million dollars. However these loans were not of benefit to either the borrower or the lender as roughly half of the loans he brokered ended in default.

There was a recent article on entrepreneur magazine’s website called “The Post-Banking Loan.” It is a very appropriately titled article about the factoring industry and how an increasing number of small businesses are turning to factors as a source of capital in the current lending environment.

However factoring, as a service, was a bit misrepresented in this article and I would like to take this time to correct a few of the points made and add some of the glaring omissions as well.

Factoring is very different from “traditional” lending. For one, it is definitely more expensive. But with the expense comes added flexibility and services that other types of lending cannot match. So this leads to the question: When is it a good time to switch to other types of financing?

To answer this question the business must first look at what financing options they qualify for. If factoring is their only option then it can help increase business volumes while building credit history, both of which may help the business to later qualify for a different, perhaps more ideal form of funding.

Small businesses in Los Angeles have recently taken a hit. Innovative Bank, one of the largest lenders of SBA loans in Los Angeles and nation wide, was closed by the California Department of Financial Institutions and their deposits were transferred to Center Financial Corp. Executives at Center have stated that they are not going to continue Innovative Bank’s high-volume small business lending and will focus on larger loans to bigger businesses.

The purpose and goal of a factoring arrangement is simple: Improve cash flows. That is the primary value that a factor provides to their clients. However, a factor’s value does not start and end with simply providing financing.  The factor assumes a host of responsibilities that are inherent and unique to this variety of financing.

All B2B companies deal with waiting 30 to 60 days to get paid on their invoices. Providing credit to buyers is ‘par for the course’ in most markets. This is fine for larger companies that can afford to wait it out, but small and mid-sized companies can be hurt by waiting so long for payment. Worse yet, smaller businesses usually have limited or no access to traditional bank loans to help make ends meet.

Why should a business with tight cash flow be extending credit? It makes no sense. The secret is: you don’t have to.

So you finally got your start-up off the ground. Congratulations. Business has been good and now you see an opportunity to expand. Congratulations again. However, expanding generally means financing, and financing means credit. Having good business credit can be the difference from capitalizing on this opportunity to expand or watching on the sidelines as it passes you by. This is why establishing the ground work for financing is so important.

The first (obvious) step is to

A line of credit is a convenient way to manage finances in a business. The money is available to use, but it is not racking up interest when it is not being tapped into. This is a good way to …

Every aspiring entrepreneur dreams of one day starting their own business. And while they might dream of the days when it grows to become a large empire, the reality is that the entrepreneur will have to start small. Starting at …