The economy is finally showing some life thus far in 2011.  The stock market is up. The unemployment rate is slowly dropping. Consumers are cautiously opening their wallets. Banks are starting to pound the pavement looking to make loans and businesses are starting to rebound.

Life is good again for small business, the backbone of the economy, right?  Well, not quite.

Despite the desire, banks are having a difficult time finding creditworthy small businesses for loans.

They are turning away small firms that desperately need cash to take advantage of the rebound and continue to fuel the recovery.

In addition, many of the small businesses that were born during the Great Recession are ready to grow, but because the firms are so new they don’t meet the strict lending criteria banks have adopted. No new employees. No new inventory. What’s a small business owner to do?  Randy Chitwood, of Dawsonville, Georgia, has an answer.  He’s started and owned small businesses his entire life.

“I started a distribution company and then a manufacturing firm and one of the constant struggles I faced with both companies was having enough working capital,” says Chitwood, who eventually sold both firms.

For his latest venture, Chitwood opened a franchise of the Interface Financial Group, an international provider of short term working capital via invoice discounting. The 51-year old business owner believes the service he provides, selling a percentage of client’s receivable in exchange for cash, is the answer to the cash crunch facing small business and a way to fuel the economic recovery.

“I wish something like this would have been around when I was a business owner scrambling to find cash,” says Chitwood, shaking his head. “Now I’m here and I’m feeling good, not only because business is booming but because I’m able to help business owners struggling to get moving in the recovery.

How it Works

“The traditional banking approach to small business maintains if you want financing, the following criteria must be met: be in business for two to three years, be profitable and have an accepted business model,” says David Banfield, president of The Interface Financial Group(IFG) which has more than 150franchises worldwide, including Chitwood. “Right now, thousands of small businesses don’t yet qualify on these levels, but they desperately need more cash to grow. So, because the banks won’t loan money, small business owners are forced to look at alternatives.”

Invoice discounting is the other way forward for many businesses who receive a “no” reply from their bank after a loan request. Banfield says IFG is seeing a global spike in demand for their services.

As an invoice discounter, IFG franchisees purchase a percentage of their clients’ verified receivables and provide them with access to instant capital. Businesses usually have cash in hand within 2 -4 business days.  Once the invoice is paid to IFG by the client’s customer the transaction is completed. This form of short-term financing offers small business owners the opportunity to access cash quickly without having to wait for their outstanding invoices to be paid.

Invoice discounting is hugely popular among countries in the European Union and is a regular practice with large enterprises in the United States. It is gaining traction amongst small businesses in the US because it is flexible; it can be used as needed.

“Small businesses are attracted to this model because they can get access to cash quickly, and the commitment isn’t permanent,” adds Banfield. “It is transactional, not a revolving loan, so the process can be repeated as frequently or infrequently as the business owner needs.”

IFG has been established for 39 years and is consistently ranked one of the top franchises among Entrepreneur magazine.

 

The State of Small Business in the United States:

  • Small firms accounted for 65 percent (or 9.8 million) of the 15 million net new jobs created between 1993 and 2009.
    Much of the job growth is from fast-growing high-impact firms, which represents about 5-6 percent of all firms and are on average 25 years old. – Source: U.S. Dept. of Labor, Bureau of Labor Statistics, Business Employment Dynamics; Advocacy-funded research by Zoltan Acs, William Parsons and Spencer Tracy, 2008
  • Small businesses rely heavily upon owner investment and bank credit, averaging about $80,000 a year for young firms. Startups rely about equally on owners’ cash injections into the business and bank credit; young firms receive about three-quarters of their funds from banks via loans, credit cards, and lines of credit. One-tenth of startups and about a third of young firms do not use capital injections. – Source: Kauffman Foundation, An Overview of the Kauffman Firm Survey: Results from the 2004–2008 Data, (Alicia Robb, E.J. Reedy, Janice Ballou, David DesRoches, Frank Potter, Zhanyun Zhao), May 2010.

 

Posted by +Pat Wyman, author and founder of HowToLearn.com