BORROWING AGAINST RECEIVABLES TO IMPROVE CASH FLOW

For years, financing in the garment industry has been as rough and tumble a game as you're likely to get in the business world. Buyers routinely pay 60 or 90 days late, while manufacturers borrow against inventory or receivables to keep their businesses running. Not so long ago, a running joke in the fashion biz was that you didn't need collateral to borrow money on Seventh Avenue because your life was on the line.

So what can an entrepreneur learn from Seventh Avenue? Maybe a lot. For years, factoring—the practice of borrowing against receivables—has been the lifeblood of fashion's day-to-day operations. In recent years, however, factoring has become an option for firms in other industries willing to pay a percentage of their receivables to speed their cash flow. Companies like Texas Instruments have found that a variation of traditional fashion industry factoring cuts their short-term financing costs by a significant margin.

If you go to a factor, however, do know what you are getting into. Traditional factors buy receivables from an established company, taking 1% to 1.5% of the value as a commission. Small business factors, however, will often deal with firms that have only a short track record. In this case they will advance a set percentage—usually 80%—of the receivables, thus insuring themselves against defaults from your clients.

If your business is time-sensitive and getting your receivables in on time can be the difference between, say, opening a new accountant's office by tax time or waiting until May, using a factor can give you a noticeable competitive edge. Remember, however, that factors will do their best to avoid taking problematic accounts off your hands (they don't want them either). And be careful of who you deal with—a few firms in the business have less than savory reputations.

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