As small businesses struggle to access cash, financial brokers are playing an essential role in helping them explore alternatives to traditional bank loans and lines of credit. 

Financial brokers work with small businesses to help them secure the financing they need to stabilize or grow. This includes analyzing the business’s financial needs, identifying suitable financing products, and helping them apply and negotiate the most favorable terms. 

What brokers do is critically important to their clients, but also to the country as a whole. Small businesses account for 44% of all economic activity in the U.S. They also employ 47% of all workers and represent 38% of the revenue generated by the private sector.

The cash crunch is real for small businesses

Helping small businesses access the cash they need to thrive has never been easy, but today, it’s harder than ever. 

Lending criteria for traditional banks and credit unions, whether large or small, have tightened significantly in recent years. Pressure from soaring interest rates, the fallout from recent high-profile bank failures, and the rising bankruptcy rates for small businesses and consumers (which are the highest they’ve been in five years) are all impacting the number of businesses that are successful in applying for traditional loans. 

Big banks are approving as few as 13% of the small business loan applications they receive, while for smaller banks, the approval rates are slightly better at 20%. However, that still means four out of every five businesses can’t rely on banks for the financial support they need.

The rules are changing for today’s brokers

For small-business brokers, these economic trends are changing the nature of the job. Brokers tend to work with businesses that have exhausted typical financing options, and because of the changing economic realities, the variety of businesses that fall into this category have expanded.

Darren Wright, Regional VP, Central Region for AR Funding, works closely with the brokers who serve small businesses, and he has seen how their client mix has changed over the years. 

“In years past, I would see difficult credits come across my desk, companies that had a bad year, lost profit, looked financially unstable,” Wright explained. “Now I’m seeing really excellent businesses looking for alternative financing because the banks don’t want to add smaller businesses to their lending portfolio.”

Wright works with brokers to help their clients access working capital through invoice factoring. Factoring can help even in circumstances where loans are not an option because the approval criteria are very different for factoring.

Instead of looking at a business’s credit history and debt-to-asset ratios, a factor looks at the quality of the business’s accounts receivable, the creditworthiness of the business’s customers, and the business’s potential for continued growth.

Factoring can help businesses rejected by banks

For brokers whose clients are unable to qualify for bank loans, factoring can be the answer. Wright describes the ideal factoring customer as a business with high growth potential and few assets to borrow against. 

“Loans and lines of credit are often predicated on business assets or the business owner’s personal assets,” Wright explains. But that formula doesn’t work for businesses that grow quickly and reinvest the revenues in business operations rather than assets, because banks can only take the value of specific assets into account, such as real estate, vehicles, or equipment. 

But factors can extend cash based on the value of a business’s accounts receivable or the contracts that business has signed with reputable customers. 

“In our industry, when someone needs a larger factoring line, we celebrate it, because it’s something we can accommodate very easily,” Wright said. “If a business doesn’t have problems getting business, we don’t have problems financing their growth, as long as the business’s customers are creditworthy.”

Staffing businesses and government contractors, in particular, can be ideal candidates for invoice factoring. Wright explained that these types of businesses can see rapid growth, but have few assets and high labor costs.”

“There’s a natural cash flow crunch with these types of companies, because they need to pay their labor every week but they don’t get paid for 30 or 60 days,” he said.

Calculate the opportunity cost 

Secured bank loans and lines of credit are one of the most affordable ways to finance business growth, with relatively low interest rates and fees, which is why it usually makes sense for a business to maximize their usage of these financing types before exploring alternative financing options. Alternative financing generally involves higher costs of borrowing, although this can range from the moderate fees associated with factoring to the 350% annual percentage rates charged by some merchant cash advances. 

However, when Wright works with brokers and their clients, he helps them weigh the opportunity cost against the cost of financing to get a more holistic picture of their options.

“Based on the options available to you, what is the cost of financing new business?” he asked. “Analyze and understand your costs. What does it cost to not be able to take on a job because you don’t have the cash on hand to finance delivery of services or products?”

Wright pointed out that this issue can hold businesses back at the exact point when they are starting to attract blue-chip customers. 

“The trend over the last decade has been for large companies—the IBMs, the Walmarts, the Amazons—to pay slower and slower. Some of our clients have gone from being paid within 30 days to waiting 90 days or even longer.”

If you are a financial broker interested in learning more about invoice factoring, contact the representative for your region.