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Dear Karen: Sales are down but service calls are up at my firm. How can I fund labor costs with sales revenue dropping?
Answer: Service companies have a longer cash cycle than product-based firms because they pay employees well before they collect invoices. You need to raise capital to bolster cash flow. Traditional sources include loans from friends, family and angel investors, bank loans and factoring. A bank loan is cost-effective but difficult to get today.
Factoring involves selling your invoices to a financing company that pays you upfront, collects your revenue and charges you a fee, which can be costly. Make sure your profit margin can sustain the expense.
Another alternative for business-to-business firms is applying for a secured accounts receivable line of credit from a bank that partners with an accounts receivable monitoring firm. Dan Drechsel, chief executive of FTRANS, one such firm based in Atlanta, says his firm collects accounts receivable and performs credit checks for small firms. This service can also help entrepreneurs qualify for loans under the U.S. Small Business Administration’s CapLine program for working capital needs, he said.