NFIB

Cybertools to Expedite Cash Flow
04/ 11/ 2002

by Melany Klinck
br> For many small business owners, "stable cash flow" seems as oxymoronic as "government service." Not so to Kevin Carney, owner of A-1 Logistics Inc., a packaging and fulfillment center near Chicago. When Carney sends out an invoice, he typically receives payment within 24 hours. No, A-1 Logistics does not have the fastest-paying clients on earth, but Carney does have an Internet-based service called Business Manager
(http://www.businessmanager.com), which allows him to receive virtually instantaneous payment from his bank for his accounts receivable.

Since signing up for Business Manager in April 1999, Carney has capitalized on his improved cash flow to grow his business from $1.1 million to more than $4 million in annual gross sales. "The number one thing this program gives you is the confidence to go after big accounts,' says Carney. "Without Business Manager, I couldn't go after those companies that don't pay me for 60 or 90 days."

A quick primer

Business Manager is based on a financing mechanism called factoring, which has long been used by larger companies to improve cash flow without taking on debt. Thanks to technology, factoring is now more affordable for small companies. Not surprisingly, the Web is awash in factoring sites targeting small businesses.

While factoring terms vary—and are often negotiable—the service basically works like this: A qualified business sells its current accounts receivable to a bank or factoring company for a discount, generating immediate cash. From that point on, the factor generally acts as the businesses' billing department, sending out invoices, collecting payments and generating reports. With Internet-based services, businesses simply submit invoices online and the factor deposits 70 to 90 percent of the invoice amount into the company's checking account, typically within a couple of days. The remainder is put in reserve for potential chargebacks. After the invoice is paid by the party being billed, the factor releases the reserve and deducts its fee, usually 2 to 5 percent of the total invoice.

Dozens of Web sites advertise factoring: GetFactored.com, which is found online at http://www.getfactored.com, and MyReceivables.com, which is at http://www.myreceivables.com, are two. But most have higher minimums and fees than Business Manager. Aquent FastCash (http://www.aquent.com) targets freelancers like Lora Moore, a Nashville, Tenn.-based graphic designer, who works for large, but often slow-paying companies. Moore signed up for FastCash in December 1999. "Things had been really slow, and with the holidays I was hemorrhaging money," recalls Moore. "So it was great then when January rolled around, and I was able to bill jobs and get paid immediately. It really carried me through a tight spot."

Like Business Manager, Aquent pays invoices within two days, charging from 3 to 5 percent for its services. While Aquent doesn't purchase current accounts receivable, it does try to collect on unpaid invoices that it bills for its members. Most factoring firms simply seek recourse from the small business owner's reserve.

Is it right for you?

Factoring is not for everyone. If your business has little price flexibility, factoring can be an expensive source of working capital. Kevin Carney, however, sees it as a requisite cost of doing business and simply adds the factoring fees, but not the reserve, into his estimates. He also notes that with a dependable cash flow, he can now take advantage of supplier discounts for paying within 10 days. As for Lora Moore, when her cash flow improved last fall, she stopped using Aquent, which doesn't require an contract — a real plus in the feast-or-famine world of freelancing.

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This article originally appeared in the May/June 2001 issue of MyBusiness Magazine, NFIB's member magazine.

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