Some Small Businesses Consider ‘Invoice Discounting’

More and more small businesses are looking for creative means of financing their ventures as bank lending dries up and the economy continues to suffer. Peer lending and …

More and more small businesses are looking for creative means of financing their ventures as bank lending dries up and the economy continues to suffer. Peer lending and pawning valuables have proven to be attractive options for some small businesses, and now invoice discounting is gaining in popularity. Invoice discounting is a process wherein a finance company purchases an invoice – a bill for a service or product – at less than its face value so that the business can get cash in hand without waiting for the billed customer to pay the invoice. David Banfield, president of Interface Financial Group, says that interest in invoice discounting has surged since the economic downturn. For more on this continue reading the following article from The Street.

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.

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.

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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.

Why is invoice-discounting a good option?

Banfield:The main funding supplier of capital for business in North America is the banking system. There are now fewer banks than a couple of years ago. Many have failed and many have been acquired. What that means for the smaller companies is that there are now less opportunities to go and seek out capital.

[Banks] don’t have the appetite to service the needs of the small businesses. Those companies might be looking for a facility of $50,000 to $100,000. If you’re looking for $50 million, I’m sure there are lots of doors that will open, but on the small-business end the banks have really shied away from that. Therefore many of those small businesses have to look somewhere else for growth and funding opportunities and there are very, very few opportunities available. The secondary market is very thin.

What is the profile of a typical company in your profile?

Banfield: In terms of employees, less than 20. In terms of annual sales, from $500,000 to probably $5 million or $6 million. In terms of longevity, it could be as little as six months up to about five years. That’s our niche.

How long does it take to get cash?

Banfield: The due diligence program takes anywhere from two to four business days to complete. Because we are not lenders, but rather buyers of assets, we can move very quickly, and our clients aren’t faced with the restrictive covenants that banks and other lenders might be looking for. We’re focused much more on the transaction and if is it a solid company. Are you going to be around tomorrow? Do you have an order book? We look at management: Do you know how to run this business? Does the business have a future?

[If a request is put in] Monday morning, they probably could get money on Thursday or Friday of the same week. We tell people that it’s fast and it’s friendly. We do things quickly; we are friendly because everything is localized and you meet with people, you don’t do business on the phone.

This article was republished with permission from The Street.


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