by Keith Mabe

As the economy slowly recovers, large companies continue to shore up their cash flow constraints by delaying payments to small business suppliers. At the same time, vendors to these same small businesses continue to demand faster payment. The result is putting small businesses out of business.

This strong-arm tactic by larger companies is squeezing the small supplier’s cash flow. Since small businesses have little bargaining power when dealing with their larger customers, they are often forced to accept more lengthy terms. This problem comes on the heels of another: Vendors (many in a cash-crunch themselves) are demanding prompt if not faster payments. This is creating a vicious cash-flow crunch cycle from customer to supplier to vendor, pushing many small businesses to the breaking point.

Making matters worse, in a credit clampdown that went too far, bank lending to small and mid-sized businesses has continued to dwindle. The SBA’s own data states that from June 2009 to June 2010, the value of outstanding loans to U.S. small businesses plunged $43 billion, a drop of more than 6 percent. This lack of lending has had a devastating impact on small businesses that were already strapped for cash, putting many of them out of business.

As business owners are continuing to struggle with cash flow during this economic recovery, financial relief seems to be scarce. However, Accounts Receivable Factoring is an often overlooked choice to help businesses manage their cash flow. This form of financing (also known as Invoice Factoring) is a financial tool that allows businesses to capitalize on the power of their outstanding Accounts Receivable. Factoring is a valuable mechanism to turn a business’ invoices into immediate cash, enabling them to fund business operations.

Although not widely understood, a factoring firm provides funds to a business based upon its Accounts Receivable. Most invoices billed to credit worthy customers can qualify. Banks, on the other hand, must consider increasingly stringent criteria before qualifying a borrower for any type of funding. In most cases, when considering assisting a business based strictly upon its accounts receivable, factoring companies can provide funds when a commercial bank cannot.

The reason many businesses employ factoring is to ensure the continuous flow of cash to the business without sacrificing equity or incurring debt. Essentially, businesses that use factoring are focusing on having most of the money now rather than all of it later. It can take time to collect an invoice, but when companies factor their accounts receivable, they get their money faster and easily are able to avoid the cash-crunch.