Critics worry the U.S. Department of the Treasury’s wind down of its Troubled Asset Relief Program (TARP) will unintentionally, adversely affect small business lending. As banks disengage from TARP, capital requirements will inevitably lead banks to maintain ever more stringent lending criteria.
Predictably, it may be difficult for some businesses seeking financing from bank lenders. Based upon previous data from the Federal Reserve’s Survey of Small Business Finances, one can conclude that measures of businesses’ access to credit were more predictive of company survival than were attributes of the business, owner, and market. It’s a story that has been developing since the credit crunch tightened the spigots on funding for small businesses. When the banks said no, non-bank funding providers increasingly said yes. Over the course of 2011, big banks rejected loan applications about 90 percent of the time.
An alternative to traditional banks that small businesses might consider in the face of adversity is Accounts Receivable Factoring (also known as Invoice Factoring). A Factor purchases a business’ accounts receivable, at a discount, to provide the business with working capital when needed. With factoring, funds are provided to the seller (business) of the accounts in form of the purchase price – a cash “advance,” often 70-85% of the amount of the accounts receivable. Upon the factor’s receipt of payment from the accounts, the balance of the accounts receivable is typically paid by the factor to the seller (business), after deducting a discount fee. Many times, small business owners who have little or no credit history or who need a lot of funds quickly turn to accounts receivable factoring.