Buddy System

Part of the trend toward banks offering more programs may have to do with the economic cycle. "Several years ago, there was a credit crunch," says Grochala. "For the last couple of years, however, small businesses have been thriving." As a result, they present a more attractive market for banks to target.

Many of the banking programs targeting small businesses are still very new, so it's difficult to say whether they are here to stay or how far they'll really go in improving the overall financial climate for small businesses. According to the 1996 Survey of Small and Mid-Sized Businesses conducted by Arthur Andersen's Enterprise Group and trade group National Small Business United (NSBU), 77 percent of the approximately 480 businesses that reported applying for a bank loan in 1996 succeeded in obtaining that loan. That's down from the 85 percent of respondents who succeeded in getting a bank loan in 1995.

Beyond traditional loans, however, banks are coming up with other ways to help finance businesses. According to the Andersen/NSBU survey, 3 percent of the nearly 1,000 companies polled said they had pledged or sold their accounts receivable--factoring, as the tactic is generally known--to help finance their businesses. Factoring isn't a new concept, but the fact that banks are beginning to offer it as part of their small-business banking programs is somewhat unique.

For David Stern, factoring is a necessary source of capital for David Stern Jewelers Inc., the Boca Raton, Florida, company he founded in 1983. When Stern ships his gold and jeweled creations to retailers nationwide, he can often expect to wait a good 90 days for payment. Selling his accounts receivable and getting the money the day he ships orders enables him to buy materials to fill additional orders.

Though Stern says he had several options when looking for a financial institution, he chose the local First Southern Bank, which buys receivables from Stern that are less than 59 days old. Factoring helps Stern service new accounts by allowing him to offer customers credit terms. "My business is growing right now," he says. "It would be impossible to grow without [the factoring program]."

According to Robert H. Santom, CEO of First Southern, the bank charges an average of 3 percent for the service and keeps another 10 percent in reserve as protection against uncollectable bills. Many companies are able to make up the 3 percent, Santom says, by taking advantage of discounts for paying insurance premiums on a yearly basis, for example, or increasing business by offering customers favorable payment terms.

This article was originally published in the March 1997 print edition of Entrepreneur with the headline: Buddy System.