Selling Receivables to Free Up Cash Flow

Lura Harrison started Covina, California-based Harrison Funding Services after the small writing and editing company she had founded experienced cash flow problems. While earning her MBA, she discovered many untapped funding alternatives, including working with factoring companies. Now she helps other small business owners find solutions to their funding problems.

Issue: You can't take your business to the next level because your cash flow is too tight.

Problem: Loans and credit cards don't seem to be the answer to your problems. What other alternatives are there to help you through your cash flow crunch?

Reality: Factoring companies can be a short-term solution any time you need cash flow, and especially when you need capital to ramp up production. Factoring companies work as middlemen: They buy your accounts receivables or invoices, pay you an advance and then reimburse you for the remainder of the bill, minus a 4 percent to 5 percent fee, once the total bill is paid.

The right way to get the job done: Figure out what you are trying to accomplish with your business and what's stopping you. "Are you trying to meet payroll, attempting to sell to a new audience, launch a new product? Get back to basics," says Harrison. "Figure out why you really need the money."

"Then take a look at your company's weaknesses. If all of your clients take more than 60 days to pay you, try to sign a new client with a shorter payment cycle. Also look at the timing of your cash inflows and cash outflows and pinpoint the time of the month when you need to have money in the bank. Then change the date of when your bills are due by a few days." If you can't figure out a simple solution to your cash crunch (and often there is an obvious answer once you examine the situation), then seek outside help.

"Each factoring company likes a different type of client," says Harrison. "Some are looking to do business only with those who do a $1 million or more a year. Others want to help with bills of $2,000 to $5,000 a month. They also specialize by industry and region. Do your research and find the best-priced and most knowledgeable factoring company for your particular business."

What to watch out for: Depending on a factoring service for too long. "I recommend factoring as a short-term solution, a way to help you out of your cash flow crunch for a year or less," says Harrison. "Before you start to work with a factoring company, you need to plot your plan and decide how you are going to work yourself out of your current financial problems."

— Susan Smith Hendrickson