By Jenny Callison
Enquirer contributor

Catherine Seifert, president of Sterling Capital Services Inc., provides factoring services to businesses in the Tristate. Factoring is an accounts receivable financing option that Seifert says can help growing businesses. The Cincinnati Enquirer/ERNEST COLEMAN

RICHWOOD - If experience has taught Catherine Seifert anything, it is that even successful businesses can have cash flow problems.

Seifert, an IBM sales representative turned start-up specialist, saw several ventures fail because of lagging accounts receivable. When she first moved to Cincinnati from Dallas and opened a branch of a Dallas promotions agency here, she soon signed several large clients. All seemed to be going well at first.

"Sales were great, profit margins were good, but the delay in payments was just terrible. We were looking at 45 to 60 days," she said. "Our transactions ... (in Asia) involved even greater delays. I had to pay some bills out of my own pocket."

The cash flow problems hurt the company's credit, keeping Seifert from getting loans and leading vendors to ask for payment up front.

"It's a vicious cycle," she says, "and we finally had to close the Cincinnati office."

Seifert later helped start two packing and fulfillment divisions for existing companies. Each time, delays in getting payment from customers doomed the promising ventures to failure.

After those three strikes, Seifert saw an opportunity. She took a hard look at cash flow problems and researched ways for businesses to keep receipts coming in promptly and steadily. She learned about accounts receivable financing, commonly called factoring.

Factoring, explained Seifert, is a business financing option that provides working capital when conventional financing is not available. A specialized financial institution called a factor buys a company's accounts receivable and gives the company cash. The company's vendors then pay the factor.

"The company receives immediate cash without incurring additional debt," she said.

Good for growth mode

Factor's Chain International Annual Review 2003, an industry publication, estimated that in the United States in 2002, more than $110 billion worth of receivables were factored.

Seifert established her own company, Sterling Capital Services Inc., to provide factoring services to the Tristate and has spent the past few months forging relationships in the local accounting and financial community - contacts who can send her companies that can't get conventional financing.

Her company represents a Dallas-based factor, Metro Financial Services, that has been in the business for 30 years.

"Metro provides about $60 million a month for small and medium-sized businesses," she said. "Last year they processed just under 500,000 invoices. They use technology to help them work efficiently."

A company that may not be able to get traditional financing still may qualify for factoring, Seifert explained. The primary difference is that a factor bases its funding decision primarily on the creditworthiness of a client's customers rather than on the client's financial strength.

Businesses that might not be good candidates for factoring include construction companies, says Seifert, because the factor can't be assured of first lien rights to their receivables.

"It's a neat concept," said Leigh Prop, senior vice president and regional manager of Fifth Third Bank. "It's particularly good for start-ups and companies that are in a growth mode. I do see factoring as a very viable option for them. But it's a concept that's not well known in this area, so Catherine has to educate, educate, educate."

The way to pay

Typically, a factor gives the client roughly 80 percent of its total accounts receivable within 24 hours of receiving its invoices, holding the other 20 percent against uncollectibe debt. . The factor bills the vendors, and the vendors send their payments to the factor.

Once the invoices are paid, the business gets the remaining 20 percent or so of its receivables minus the factor's fees. The factor charges 1.5 percent to 2.5 percent for each billing cycle it handles.

Though the factor does not act as a traditional collection agency, it does help speed up collection - to an average of 36 days compared to a national average of 42 days, Seifert says. "They get paid sooner because that's all we do," she said.

In getting Sterling Capital established, Seifert has consulted with George Pillow, a former factoring client.

Pillow, owner of Pillow Express Logistics in Indianapolis and United Courier Service in Cincinnati, used accounts receivable financing to get Pillow Express - his first venture - moving.

"When I was just starting out, we landed some huge accounts that were very slow in paying," he said. "It created a cash crisis for us on a weekly basis. We went to a Chicago-based factor and used them for about two years. It was an excellent experience and really made a difference in our cash flow."

Lending institutions can work with factors to help their customers, Prop said.

"You never want to flat-out turn somebody down for a loan. We can introduce them to a factor and provide alternative options to traditional bank financing," she explained.

"Once the customer does become 'bankable,' they already have that relationship with the bank. We step right back in and continue the relationship."

E-mail jcallison@zoomtown.com