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In today’s credit restricted economy, it’s more important than ever for small to medium-sized businesses to know what forms of financing are available to them.

One of the biggest challenges for many small business owners is chasing up slow payers or late invoices, with 90% of small business failures in Australia caused by poor cash flow.

With the recent global financial crisis, and the rise in the banks’ own funding costs, banks are protecting their internal balance sheets more than ever, and are simply not taking on the risk in the form of loans to small businesses. To ensure their success, emerging growth companies need to rely on alternative forms of financing, like accounts receivable factoring.

Accounts receivable factoring, also known as invoice factoring, is a form of commercial financing or debt financing which allows a company to use its Accounts Receivable as collateral for borrowing money. Basically, a factoring company makes arrangements to finance a company’s invoices, in exchange for immediate payment to ensure the business has the necessary working capital to operate effectively.

For small businesses that need immediate funds, invoice factoring can work well because – unlike a bank loan or credit card – the available funds can grow as the Accounts Receivables balance increases. In addition, the credit worthiness of the small business’ customer will often be more important than its own credit rating. It benefits businesses that don’t get paid for 30 to 60 or 90 days, by advancing up to 90% against invoices.

As an example, let’s say a mining services contractor wins has a contract with one of the big mines. This is great news for the small business, but they find out that the mine will only pay them 30 days from the end of the month in which the invoice is raised. If they have to pay their staff more quickly than that, then they have a cash flow problem.

With factoring, the mining services business can accelerate its access to the cash tied up in the invoice, allowing them to make payroll and continue earning the margins on the contract.
Primarily, there are eight primary reasons for a small business to consider invoice factoring as part of their 2010 business operations:

- Speed
Unlike most finance facilities, the factoring relationship can be set up within days, and once established, the funding of the invoice can happen between 24 to 48 hours. By receiving cash soon after the invoice is raised, the business will find that its cash flow is improved.

- Financial
Most of the funding decision is based on the credit of the customer.

- Credit limit
As long as the client is invoicing credit-worthy customers, factoring relationships can grow in line with the client’s increase in Receivables .

- Discipline
Lack of discipline often causes companies to not pay loans regularly down the line. With factoring, there’s no lack of discipline – each time a customer pays the invoice, it retires the mini-loan.

- Equity
Factoring is considered an off-balance sheet form of financing, which keeps any net term liability off the corporate balance sheet, preserving the equity position in a positive manner.

- Set up
The process of getting set up requires minimal paperwork and no lengthy negotiations compared to banks and equity venture funding.

- Cost
The cost of factoring invoices is relative to the short-term nature of the transaction, not lasting more than 90 days – more than a bank, but less than a Venture Capitalist. Companies with thin profit margins are not good candidates for factoring to grow their business.

- Growth
Having access to capital improves the financial position of a growing company. While factoring is a short-term solution, it ultimately leads them to conventional bank financing.

Remember, the successful small business is the one who finds that all-important cash stream, without going into debt. Invoice discounting offers an alternative to the traditional bank loan or credit card, allowing business owners to concentrate on growing their business, instead of paying for it.

David Hechter is the Chief Operating Officer of The Interface Financial Group in Australia. IFG is the largest alternative funding source for small business in New Zealand and North America, and provides short-term working capital funding in the form of an Invoice Discounting service. Visit www.ifgnetwork.com.au for further information.