The Bond Bubble and Invoice Factoring
The Bond Bubble and Invoice Factoring
Regardless of how you define deflation, its prospect is a major threat to small business funding. It’s defined in different ways depending on what you read. The most common definition is falling prices. With this in mind, falling prices more the result of what we view as the deflation. The definition we like is “a contraction in the supply of money and credit in the economy”. With easy credit, the bond bubble has expanded to create trillions in global debt.
Perhaps you are wondering what this has to do with invoice factoring? Here’s how.
When the supply of credit shrinks, its called a credit crunch. As you remember, we experienced that during the financial crisis. The result- banks stop lending. The only lending that will remain is secured, asset based lending.
The Bond Bubble Threatens Small Business Funding
Small businesses should fare the worst if the deflation is as scary as some predict. This is because During the financial crisis, we saw bank lending to small businesses dry up in many states. In fact, Fox News revealed that the U.S. lost 200,000 due to a lack of small businesses funding as measured by the Census Bureau.1 Up to 82% of small businesses failures stemmed from a lack of funding.
So a viable option for many businesses is invoice or accounts receivable factoring. In case you’re wondering what is factoring, here’s a quick refresher
‘The prospect of deflation is a major threat to small business funding.’
Invoice Factoring is not a Loan
Since your business sells unpaid invoice to a factoring company, you sidestep the need for lending. Remember, invoice factoring improves net working capital while incurring no new debt, while invoice financing is subject to the availability of credit.
Our advice would be to establish a business relationship with an invoice factoring company sooner rather than later. Look for a company that will let you factor a single invoice, known as spot factoring. This way, even if you hadn’t planned on factoring receivables, you will officially be a customer of theirs. This is important because when the bond bubble pops and deflation begins in earnest, every small business in America could be looking for a factoring company.
‘When deflation kicks in and credit does dry up, every small business in America may be looking for a factoring company’
Here’s another tip when selecting the best invoice factoring companies for your situation, make sure they offer non-recourse factoring (not all do). Factoring companies could very easily stop offering the non recourse factoring option to new customers and make all the transactions done on a full recourse basis. You could have a better chance to remain operating under a non-recourse method (basically being ‘grandfathered’ in). Check our factoring company reviews to locate a factor in your area. Like with a business line of credit, the time to apply for small business funding is before you need to.
Some factors with deeper pockets (either backed by venture capital like Fundbox) or affiliated with a bank (such as Florida’s Amerifactors or Michigan based Crestmark) should weather an economic downturn better than most.
2http://www.mckinsey.com/global-themes/employment-and-growth/debt-and-not-much-deleveraging