How Much Of A Factor Is Factoring In Fending Off Small Business Bankruptcy?

I admit it – I’ve got a soapbox. After almost twenty-five years of serving as adviser to small businesses and their owners, the one piece of advice that I just cannot seem to emphasize enough is the importance of getting help at the very first signs of financial trouble in a business. In one of my very earliest blog posts, I talked about how many people imagine that, when debts pile up for a small business, the only ending the story can have is bankruptcy. And with all the false information circulating around about the bankruptcy process and all the fear reaction that false information engenders, business owners simply put off making vital financial decisions until bankruptcy may in fact have become their only viable option.

Today’s business climate presents quite a set of challenges to even the best-run small business, no doubt about it. Lending standards are tightening, retail sales are down, costs for many of the supplies and commodities small businesses need to operate have climbed. But what the IBJ refers to as the “real aftershock” of the credit crisis that’s hitting small businesses especially hard are slow payments from customers. Small businesses are hugely dependent on their cash flow. If they aren’t being paid on time, they must cut costs and/or find alternate funding.

In my earlier bankruptcy blog Factoring – Small Business Bankruptcy Blockade?, I described one of the alternatives I discuss with small business owners as a way to buy time for the business to regroup. Factors are companies that provide cash in exchange for taking over some of the accounts receivable of a business. If a small business needs cash in a hurry to pay its own bills because its customers are delaying payment, factoring could make money available quickly. Business owners need to understand that a factor will be buying the accounts receivable at a considerable discount, making factoring a more expensive option than a short term bank loan. But, in cases where tightening bank standards have made it difficult for a small business to qualify for loans or even to renew existing loans, factoring may prove a viable choice.

A point I’ve often stressed is that there is no one strategy, in fact no one combination of strategies that’s right for every business in every situation. My function as a small business bankruptcy attorney is to debunk myths and help business owners explore their options – all of them.