Business Financing – The Internet Opens Up Unique Small Opportunities

In good economic times, it can often be difficult to obtain a small business loan. But, when times are tough, it becomes nearly impossible to convince a bank to take a risk on a small to mid-sized business. This puts the business owner in a tight position because he needs money to grow and make improvements if he is going to succeed. Innovations in small business financing on the Internet have opened up a whole world of possibilities for small to mid-sized business owners.

The latest trend is invoice financing marketplaces that offer services similar to accounts receivable factoring. For the business who is interested in accessing cash that is owed to them, here are the basics of this small business financing process and some key words to know:

The Basic Process:

A small to mid-size business owner needs cash now for growth, an improvement or even to make payroll. He has outstanding invoices where clients owe him money. He won’t see the money for a month or two, sometimes even longer. This is capital that is inaccessible to him at the moment.

So, he lists the invoices on an online auction site where an buyer purchases the invoice. For a fee, the business owner can access the working capital and use it to help his business grow. The buyer diversifies his investment portfolio with this low-risk, short-term financing opportunity and makes some money.

Words to Know

Invoice Financing versus Factoring- While the two are similar, the financing option gives more power to the seller whereas factoring allows the buyer to hold most of the cards.

In the marketplace for this form of small business financing, accounts receivable are posted at the discretion of the seller who also gets to set the minimum advance price and maximum discount fee. It is not a loan, but allows businesses to access money owed to them before the invoice due date.

Debtor – This is the customer who owes money to the business.

Accounts Receivable Invoice- This is the record of money owed to the business and what is posted on the auction site for purchase.

Buyers – This is the entity that purchases the accounts receivable invoice. The typical receivables buyer consists of banks, hedge-funds and other large financial and investment entities.

Advance – Prior to the completion of the transaction, the buyer agrees to a certain amount of cash advanced to the business. The amount may lean a seller towards one buyer over another. Once the debtor has paid the invoice in full, the seller receives the rest of the cash minus the fees.

Auction Closing Date – The seller can set the length of the auction process.

Asset-based Financing – This is a way for small businesses to access capital through the assets or collateral of the business. In this case, the asset is the outstanding invoice and it is a creative alternative to conventional bank loans.

Discount Fee – This is the amount determined by the auction that the seller pays the buyer upon sell of the invoice. It is basically how the investor makes his money. The seller can place a maximum value that he is willing to pay.

Buyout Price – Similar to eBay’s Buy It Now feature, Sellers can set a favorable price for which he’s willing to sell the invoice and end the auction before the specified close date.

A simple application to the online auction site can put a small to mid-sized business on the road to success with this innovative small business financing process.