Factoring as funding option

Dear Karen: What is factoring? Can I use it in a small business?

Answer: Factoring is an alternative funding source that originated in the garment trade. Factors buy commercial invoices at a discount from business-to-business companies. The factor collects the payment, than sends the balance to the company, minus its fee. Fees typically range from 1% to 5%.

“If a company were to submit a $20,000 invoice, we might advance the company 75% of that invoice, or $15,000. After we collect the full payment, we’d send the balance of $5,000, less our fees,” said Brad Bernstein, president of factor Anchor Funding Services. The company gets a cash flow boost by being paid up front instead of waiting 30 to 90 days.

Unlike a bank loan, factoring doesn’t depend on an entrepreneur’s credit score, the company’s history or its profitability. “We only care that it’s a good invoice for services rendered,” Bernstein said. His company works with small firms in many industries, including staffing, information technology services and manufacturing.

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No ‘one-size’ strategy for firms

Dear Karen: I’m starting a part-time Web-design business from a home office. Should I establish an S-Corp. or an LLC?

Answer: There is no one-size-fits-all answer. A professional can help you sort through the variables, including your financial situation, potential liability risks, plans for your company’s growth and tax implications. “A good accountant can advise you concerning taxation of various entities for your particular business, and help you set up books and file tax returns for the business,” Los Angeles attorney C. Dickinson Hill said.

You’ll probably do fine operating as a sole proprietorship initially. This form of business entity is the easiest and cheapest to set up, and you can do it yourself following guidelines found online or in business start-up books. Once you have substantial income or want to make the Web business full time, you can consider incorporation or limited liability company formation.

“California corporations and limited liability companies must pay a minimum franchise tax of $800 every year, so you’ll need to budget for that, business license fees and tax return preparation,” Hill said.

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Family firm can survive a death

Dear Karen: My husband, who founded our company, is very ill. Can a family firm survive after the founder’s death?

Answer: Yes, but it can be difficult, particularly if the firm has no succession plan. The biggest obstacle is when the firm’s major asset is the founder’s credibility and relationships with clients and suppliers. Once that person is gone, it’s often tough for a new owner to continue that goodwill.

Judi Seidman took over her family’s firm, InGroup Licensing of New York, after her husband, Steven, died of cancer in 2007. He had been the public face of the firm for 14 years. “After he died, I didn’t feel that I had the strength to do it. But I knew that Steven would have wanted InGroup to keep going,” she said.

“I had always been his partner behind the scenes, doing invoicing and receivables. When I took on a greater role, I had to get out and meet people, talk to them and promise them I would run the business exactly the way he did,” Seidman said. “We reorganized the company after the economy changed last year, but we have not lost any clients. We’re right where we want to be now.”

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Got a question about running or starting a small enterprise? E-mail it to ke.klein@ latimes.com or mail it to In Box, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.