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An Alternative in Small Business Finance, Community-Based Factoring Companies and Small Business Lending

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  • Dimitri B. Papadimitriou

    ()

  • Ronnie J. Phillips
  • L. Randall Wray

    ()

Abstract

According to Papadimitriou, Phillips, and Wray, at a time when small businesses are suffering from a credit crunch, "niche" financial institutions are filling the void left by more traditional sources of financing, such as commercial banks. The authors argue that the most important of these niche players are community-based factor companies, which are rapidly expanding from their client base in apparel and textiles to finance a range of firms in everything from electronics to health care. The purchase of accounts receivable by factors enhances the balance sheets of their clients, making it easier for the clients to obtain bank financing. Also, because factors are more interested in the creditworthiness of a client's customers than of the client itself, they are willing to extend loans in excess of collateral to rapidly growing businesses. Because factors are becoming an increasingly important source of financing for small and start-up businesses, the authors propose that factors be encouraged to play a broader role in financing firms in distressed communities by (1) making some factors eligible for funding and assistance under legislation regulating community development financial institutions and (2) by allowing investments by banks in factors to count toward compliance under the Community Reinvestment Act.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Public Policy Brief Archive with number 12.

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Handle: RePEc:lev:levppb:12

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  1. Alicia H. Munnell, 1992. "Mortgage lending in Boston: interpreting HMDA data," Working Papers 92-7, Federal Reserve Bank of Boston.
  2. Hyman P. Minsky & Dimitri B. Papadimitriou & Ronnie J. Phillips & L. Randall Wray, 1992. "Community Development Banks," Economics Working Paper Archive wp_83, Levy Economics Institute.
  3. Steven J. Davis & John Haltiwanger & Scott Schuh, 1993. "Small Business and Job Creation: Dissecting the Myth and Reassessing theFacts," NBER Working Papers 4492, National Bureau of Economic Research, Inc.
  4. Mian, Shehzad L & Smith, Clifford W, Jr, 1992. " Accounts Receivable Management Policy: Theory and Evidence," Journal of Finance, American Finance Association, vol. 47(1), pages 169-200, March.
  5. George E. French, 1994. "Banking in Transition," Economics Working Paper Archive wp_114, Levy Economics Institute.
  6. Daniel E. Nolle, 1994. "Banking Industry Consolidation: Changes and Implications for the Future," Economics Working Paper Archive wp_111, Levy Economics Institute.
  7. Jerry L. Jordan, 1993. "Community lending and economic development," Economic Commentary, Federal Reserve Bank of Cleveland, issue Nov.
  8. Donald G. Simonson, 1994. "Business Strategies: Bank Commercial Lending vs. Finance Company Lending," Economics Working Paper Archive wp_112, Levy Economics Institute.
  9. David C. Wheelock, 1993. "Is the banking industry in decline? Recent trends and future prospects from a historical perspective," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 3-22.
  10. Eli M. Remolona & Kurt C. Wulfekuhler, 1992. "Finance companies, bank competition, and niche markets," Quarterly Review, Federal Reserve Bank of New York, issue Sum, pages 25-38.
  11. Dimitri B. Papadimitriou & Ronnie J. Phillips & L. Randall Wray, 1993. "The Community Reinvestment Act, Lending Discrimination, and the Role of Community Development Banks," Economics Working Paper Archive wp_95, Levy Economics Institute.
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Cited by:
  1. Darius Palia & Ben Sopranzetti, 2004. "Securitizing Accounts Receivable," Review of Quantitative Finance and Accounting, Springer, vol. 22(1), pages 29-38, January.
  2. Mark Carey & Mitch Post & Steven A. Sharpe, 1996. "Does corporate lending by banks and finance companies differ? Evidence on specialization in private debt contracting," Finance and Economics Discussion Series 96-25, Board of Governors of the Federal Reserve System (U.S.).
  3. Sopranzetti, Ben J., 1999. "Selling accounts receivable and the underinvestment problem," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(2), pages 291-301.

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