If the analysis of the 2 previous posts is correct (i.e. a potential US real estate meltdown, large numbers of mortgage defaults leading to a liquidity crisis), then it suggests that a US recession is taking shape – despite optimistic statements to the contrary from the Fed.
The first thing that will happen is a reduction in consumer spending as individual bankruptcies increase. Remember the average US consumer is maxed out on their credit cards as well. This will affect purchasing power and cause a retail slowdown.
This in turn will affect manufacturing. Production will slow, inventories will increase, job layoffs will start. While interest rates will remain relatively low, getting a business loan will become harder. Banks already hurt by mortgage defaults, will look for strong financial ability on the part of the business, to make the monthly payments and underlying assets to secure the loan.
Further, businesses will see that their customers are taking longer and longer to pay for goods and services supplied to them. Credit terms that are extended by one business to another, only make liquidity issues worse.
This is where Factoring can be helpful:
1. The business may find it hard to qualify for the bank loan. Factoring is not a loan. It is the outright sale of the invoices.
2. Reduced sales and rising payment times from existing customers mean slower, unpredictable cash flow. Factoring regulates cash flow, with almost immediately available cash.
3. Since Factoring is based on the creditworthiness of the customer, Factoring companies often provide helpful information about the credit standing of the customer. The business will know beforehand whether to do business with that customer and if so, on what terms.
© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved
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