How Small Businesses Secure Capital to Stay Strong

Small Biz

Anyone paying even the slightest attention to the economy can tell you about the importance of small businesses. Savvy business people understand that the economy is in many ways a reflection of the success of small businesses. As a matter of fact, small businesses comprise 99.7 percent of U.S. employer firms. However, despite making up an overwhelming majority of the economy, small and medium-sized businesses (SMBs) still find themselves pushed around by the bigger fish in the pond. Big companies with more working capital use their size to push around SMBs for their own convenience. The result is a one-sided economy that fails to protect the businesses that are supporting it.

Net Terms Are Not Always Fair to Small Businesses

For so many small businesses, particularly startups and those in their first few years of operation, every order and invoice is a big deal. SMBs work hard to establish client-bases and reputations. As they develop these relationships, very few SMBs are in a position to play hardball or turn down potential business. Large corporations know this, and they use it to their advantage when it comes to paying their bills.

Net payment terms are when a buyer agrees to pay a seller within a specific time frame. An example would be “net 30” terms, when a business expects payment no later than 30 days from sending an invoice. This can prove particularly beneficial for business deals involving contractors or service-based businesses who are also awaiting payment from an end client. The issues for SMBs arise when huge companies with large cash reserves request net terms as for as much as 60, 90, or, in the most extreme cases, 120 days. Payment terms like this can hamstring small and medium-sized businesses while creating devastating cash flow gaps that can quickly shut the doors on businesses unprepared to handle the squeeze.

If this sounds like it’s a raw deal for SMBs, then that’s because it is. Large corporations can throw their weight around to enforce terms that look great on their own balance sheets, but it puts small businesses at a severe disadvantage. SMBs rely on timely payment of their invoices to pay employees, pay bills, and fund new orders. Sadly, a whopping 60 percent of invoices are paid late. It’s not unreasonable for businesses to want to be paid on time for goods and services they have already provided. Where can small and medium-sized businesses turn when it comes to bridging cash flow gaps created by fundamentally unfair business practices? Thankfully, there are options available that are changing the game for small businesses looking to keep more cash on hand.

The Importance of Closing Cash Flow Gaps

Cash flow gaps are more than an inconvenience for small businesses, they can be game-ending if left unchecked. For many SMBs, staying afloat for months on end while awaiting payment on an order they’ve already completed can spell disaster. The world doesn’t wait because your clients want to flex net terms to the max. As a result, many small businesses are now looking toward loans and lines of credit to bridge the gap while awaiting payment. However, even in a strong economy, banks are hesitant to loosen the purse strings when it comes to lending. This has led businesses to consider lines of credit, or even credit cards, when it comes to getting employees paid on time.

While credit can be a useful tool in a pinch, it still fails to resolve the issue of the cash flow gap in the first place. At worst, operating fast and loose when it comes to credit can quickly land small businesses in a vicious cycle of debt that can be difficult to break. The most important thing for small and medium-sized businesses is to maintain a positive cash flow by ensuring that their outstanding invoices are paid on time in the first place.

Invoice Financing Offers Businesses a Better Way

A fundamental issue at the core of these cash flow gaps is the need for businesses to have their invoices paid on time. Really, businesses shouldn’t have to take out lines of credit to make up for money they’ve already earned. It’s counterproductive and fails to work as a long-term solution to a problem that doesn’t seem to be going anywhere. Enter online invoice financing.

Online invoice financing allows SMBs to receive funding for invoices they have already created. The company uses the invoice as collateral with the online lender and can be advanced up to 100 percent of the invoiced amount in as fast as 24-hours. A far cry from the 90 days they may be forced to wait from large corporations.

Because the business is essentially receiving an advance on capital which they have already invoiced, the risk is significantly reduced for lenders. The lender is paid back when the invoice is finally paid, or, in the case of invoice factoring, takes over the invoice altogether. The end result is that SMBs find the capital they need to keep their operations running smoothly without resorting to taking on credit or extra debt.

Finding the Capital SMBs Need to Succeed

Small businesses are the backbone of the economy. It’s vital that these companies are able to flourish if we are to ensure prosperity for the rest of the country. By helping these businesses secure the capital they are owed for work they’ve provided, alternative lending is forging a crucial link in the chain of working capital management for small and medium-sized businesses.

Receiving honest pay for honest work is hardly an innovative concept. That said, it’s remarkable how many large corporations choose to ignore this time-honored axiom. Thanks to new technology and innovative alternative lending, businesses are finding a new lease on life in a world of net payment terms. If we cannot rely on these corporations to adjust their billing practices, we can change the game to ensure that small and medium-sized businesses are at least on the same playing field.


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