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BETHESDA, Md. ( MainStreet) -- It's well-known by now that the down economy has strapped a number of small businesses seeking financing. With banks reluctant to lend, particularly to newer companies or to those needing the smallest of loans, these businesses are seeking funding alternatives.
The smallest businesses have limited options for quick cash, though. Two options growing in popularity include
peer lending and
pawning small valuables. Another option is a form of factoring called invoice discounting.
The down economy has led more small businesses to turn to invoice discounting, a form of factoring, for cash-flow assistance.
Interface Financial Group provides funding to small businesses through invoice discounting. The 39-year-old franchised company, which operates in seven countries, says it has seen demand for its services grow exponentially recently as a result of the economy.
David Banfield, president of Interface Financial, explains how the process works.
What is invoice discounting?Banfield: A company manufactures a product or provides a service and when they deliver that, they give the customer an invoice. That piece of paper is basically evidence of the transaction, and the customer will pay that invoice in 30, 40 or 50 days' time. Yet the company that created the product would like to have the money today. We step into the transaction and we buy that piece of paper from the company and we buy it at a small discount. The company that sold the invoice to us now has cash and we own the invoice, and we sit with that paper until we get paid by the customer the full face value of the invoice.
What types of small businesses are appropriate for this form of "cash advance"?Banfield:The way we created our business is such that we can accommodate virtually any business that sells to another business -- always b2b -- providing they issue an invoice and sell on net-30 day terms.
We have in our portfolio 65% of companies engaged in service businesses, and the balance of 35% probably engage in manufacturing of one form or another. That's a shift in the numbers. If you had looked at those numbers 10 years ago, 65% were manufacturers and 35% were service providers. It's a sign of the times. In North America, we're really not making anything anymore. We source it offshore.