Tell small business owners the economy is getting better and you might get a slightly confused look. Sure, the numbers are moving in the right direction and there are some indications recovery is taking hold: empty storefronts are being filled, construction seems to be starting and help wanted signs are springing up next to the spring flowers. But it’s tough to be optimistic when it’s a challenge to get access to capital to fund growth and be ready to take advantage of whatever opportunities a slow recovery provides.
The challenge; many banks still aren’t lending to small business owners. For example, the International Franchise Association reports new lending to franchises will total $9.5 billion this year, according to new data released by the IFA. While that’s up slightly from 2011, it falls well short of the $11.72 billion the IFA says franchise owners will look for in 2012.
That data doesn’t include lending to small businesses that aren’t part of a franchise system. My clients range from an HVAC installer, to a small trucking company, a restoration contractor (fire, flood cleanup) and a document management firm, all scattered throughout Southern Indiana. They are all small businesses with 10-20 employees or less and tell me even banks that are willing to lend are not making loans in the smaller amounts small business owners are looking for; amounts ranging from $10,000-$100,000. From the data and my own experience, I can tell you small business owners face a challenge getting the cash they need to survive and grow in a slow economy.
The bottom line: small business owners can’t wait for the economy to improve, or banks to move, or politicians to create a new program to help their companies survive. Small business owners need cash now and they’ll need to find these financial lifelines on their own.
One new option just approved by Congress is contained in the bipartisan Jumpstart Our Business Startups- or JOBS- Act. It loosens restrictions so business can more easily raise capital and, implied in that, create jobs. The federal Securities and Exchange Commission hopes to have the rules in place to implement the law by the end of the year, but one of the provisions allows entrepreneurs to raise up to $1 million annually in their companies through crowdfunding; soliciting small investors to buy stock over the internet. The law does restrict how much individuals can invest- and potentially lose- every year.
This is, of course, geared toward startup companies. There is also risk involved. But it is a unique way for a small business owner just starting out to raise cash.
For more established companies, especially retailers, restaurants and small firms where most customers pay with credit cards, there is still the process called merchant cash advances. Firms providing this service provide capital in exchange for a share of future credit card or debit card sales. As the economy has recovered and customers are spending more, this service is becoming more attractive as the prospects for future sales are looking brighter. Providers usually charge between 8%-10% of gross sales against the advance.
Entrepreneurs signing on with U.S. franchisers are still able to get help from their parent company. Some companies are providing loans to franchisees in addition to the normal franchise support systems. Other firms have executives in place whose role is help franchisees get loans, including helping banks and other traditional lenders understand how a franchise system works, its business strategy and plan for growth, and the risks as well as the rewards of lending to a franchise.
There’s also the practice called invoice discounting or invoice factoring, a financial transaction in which a business sells its accounts receivables to a factoring provider. This practice has been around for centuries, tracing its roots back to 14th century Europe. In fact, discounting, or factoring, is still used extensively by companies large and small in Europe and by large corporations in the U.S. It is, however, growing in popularity with small businesses in the U.S. and saw a surge as the Great Recession took hold. What makes factoring so attractive is the fact there is no loan associated with this method of cash management: the emphasis is on the value of the receivables and they role they play as a company’s asset, rather than the credit worthiness of the business. So, as the recession worsened and companies that had invoices due in 30 days saw those payment times grow longer, their cash flow issues grew more and more critical. Because invoice discounting/factoring involves providing capital in exchange for buying a portion of a company’s verified receivables, a business owner can have cash in 1-2 business days, without waiting for their outstanding invoices to be paid. This form of cash management works not only for a startup that has yet to establish a traditional banking relationship but also for an existing business that has cash flow issues and does not meet the qualifications for a traditional loan. Since there are also no worries about borrowing against future sales, this service can be used as needed and repeated.
The good news is that most economists now say the economy is in a self-sustaining, through fragile, growth mode and it is unlikely it will slip back into recession. However, growth will be slow and traditional bank loans to finance further growth will be challenging to find. Fortunately for small business owners, there is alternative financing to be found. Entrepreneurs will need to find the financing method that is right for them.
Family portrait: Chris Hussey with his wife
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