Your new business just landed a big client, and you need money now – for more workers or equipment to handle the job.

Banks won't lend to you, because your business is too new.

But there are some guys in town who can get you cash. It'll cost you, at the equivalent of an annual interest rate of 50 percent or more. And the deal won't come under the eye of state or federal regulators.

It's all legal, though – a centuries-old system called factoring.

As banks tighten small-business lending, factoring companies are filling the gap. Multibillion-dollar bank subsidiaries dominate the industry, but tiny independents are springing up fast.

"It's new, and I've had a number of people come to me thinking about going into that business," said Ronald E. Walker, New Castle County Chamber of Commerce small-business officer.

Rules of the game

Here's how factoring works:

Take a company like Nortec Inc. near New Castle, a year-old business that works for credit-card banks. Nortec's specialty is sorting the millions of credit-card mailings that come back marked "return to sender."

The mailings come in waves, so Nortec sometimes needs to hire extra help. But the wages must be paid within days, while the banks that hired Nortec may not pay up for weeks.

To cover the shortfall, Nortec takes the debts owed it by the banks and sells them to a factor. In this case, the receivables go to Star Financial of Wilmington – founded in 1990, probably Delaware's oldest and largest factor.

Star pays Nortec perhaps 97 cents on the dollar for the debts, and eventually collects the full payment from Nortec's bank clients.

So Nortec gets cash upfront for its work. And Star keeps 3 percent of a 30-day receivable, the equivalent of a 36 percent annual return on its investment. Its fees are among the lowest in the industry.

For businesses, "it's not a cheap way of doing things," Star president Henry H. Beckler said. "But there are a lot of advantages."

At Nortec, "we can adjust temporary fluctuations in cash flow. ... and we've been able to put a fortune back into the business," President Robert S. Burnham said.

"Most small companies sprouting up have a need for more capital than maybe a bank will give them," said Raymond C. Garden, president of Assured Information Systems Inc., a 12-year-old software company in Chadds Ford, Pa.

Garden began factoring receivables this year. "It allows me to do more research and development, which is vital to the software industry, and marketing," he said.

"A company can always use more financing," Garden said. "It depends on how fast they want to grow.

"One of the problems with service industries is that we don't have a warehouse full of widgets" to secure a bank loan, he said. "Our assets are our abilities to generate invoices."

Also, factoring offers capital without adding debt to a company's balance sheet, and without bringing in meddlesome investors.

The 'secret of the giants'

Factoring has been "the financing secret of the giants," said one factor's ad. For decades, it's been a mainstay of garment and textile industries – a way to even out cash flow, and to farm out accounting and collection of receivables.

Since factors buy their customers' receivables rather than making loans, the business is not regulated as lending.

But many of the largest factors are bank-owned. Bank of New York's factoring subsidiary did about $11 billion in business last year; NationsBank Corp.'s factor, nearly $8 billion.

Factoring grew from a $58 billion business in 1993 to $77 billion last year, according to the National Association of Factoring Professionals trade group. That's after 10 years of more modest growth, from $33 billion in 1983.

Partly, that's because giants such as NationsBank have branched into areas such as financing imports. But partly, it's because factoring is growing at the grass-roots level – as it is in Delaware.

"Five years ago, there was hardly any factoring at all in Delaware," said David W. Holmes, small-business counselor for the Service Corps of Retired Executives. "Now, there are four or five outfits I know of working the street."

A new breed fills the void

Some are a new breed in the industry: the factor brokers.

Like independent insurance agents, the brokers shop among about 400 U.S. factors for one to buy a particular client' s receivables. When they make a match, brokers collect perhaps 15 percent of the factor' s fees.

It's a part-time job – at least for now – for brokers like Elmer White of Wilmington and his brother-in-law, Edmund Sheehan. White works for a New Jersey maintenance supply house, and Sheehan owns vending machines.

Since last fall, the two have been slowly expanding their Worldwide Capital Associates – now with a handful of clients including an ad agency and a small manufacturer.

"A lot of businesses out there need money right away," White said.

And while a lender would scrutinize the businesses' assets and credit record, a factor is more concerned with the receivables – and the soundness of the companies that owe them.

"Joe's Plumbing Co. may be mortgaged to the hilt," said R. Steven Robins, president of Newark brokers and factors Alta Funding Corp. "But he's doing work for MBNA and DuPont, and I know they're going to pay."

Brokers nationwide fetch business for factors such as First Capital Services Inc. of Boca Raton, Fla. Privately held First Capital opened four years ago to finance small and mid-sized companies.

"After the savings and loan situation, banks pulled in their horns and left a void," Vice President Thomas J. Wheatley said.

Three years ago, there were few, if any, factor brokers. Today, there are perhaps 3,000 nationwide, according to Deborah Bracknell, executive director of the National Association of Factoring Professionals. The Orlando, Fla.-based group tests and certifies brokers.

Nationwide, factors actively pursue brokers to bring them business. "They don't want to have to train sales people and have them on their payrolls. They actually woo us," said C. Frederick Kirschman of Alta Funding.

A growing independent field

Like Kirschman and Robins, some brokers become factors themselves, if only on a small scale – using their own funds to buy small-business receivables and reap the returns.

Take Rose Marie Zerenner and her husband, Emest, of Pike Creek, who turned an investment hobby into their Greszco Financial Inc. factoring business.

After moving from stocks and bonds into buying mortgages, Rose Marie Zerenner became a factor broker. But she found factors weren't interested in the smallest businesses – those with receivables as small as $1,000 a month. Star Financial's smallest accounts, for instance, are $15,000.

Starting with about $50,000 in their own money, the Zerenners began buying small receivables two years ago. Since then, "our business has been doubling every year. It's been phenomenal," she said.

"We are turning people away. We have regular clients" – perhaps half a dozen, from machinists to computer companies – "and we must keep them funded," she said. To add resources, she plans to merge with a small California factor.

With the merger, Zerenner hopes to collect enough receivables that she can in turn finance them with nationwide factors – and "free up capital to take on the next batch," she said.

Alta Funding's Robins and Kirschman – two DuPont Co. financial managers who retired early – began as brokers two years ago. Since then, the two have helped fund perhaps 20 small businesses. When a deal exceeds $50,000 or so, they broker it to a larger factor such as Star Financial.

A former consultant to Wilmington banks, Beckler started Star in 1990. Today, the factor buys $3.5 million a month in receivables from 40 companies, as far off as Texas and Florida.

Many are temporary-help firms. "As companies downsize, they're using more temps. But the problem is that big companies make temp companies wait so long for their money," Beckler said.

'Like a powder factory'

It' s a profitable business but a tricky one – "like working in a powder factory," Beckler said.

Among the factor's risks: Receivables may turn out to be worthless, if the companies that owe the money can't or won't pay up.

"We check out our clients' customers very thoroughly," Alta's Robins said.

"We are not a collection agency, though some people see us as that," said Rose Marie Zerenner of Greszco.

So factors build in some insurance. Typically, the factor at first pays clients 75 percent to 90 percent of the receivables' value – withholding the rest until the debt is collected.

And often, factors will insist that clients buy back overdue receivables or replace them with new ones. So-called "recourse" factoring may carry lower fees.

Another touchy area: the stigma that can stick to companies using factors.

"There might be the image that the company factoring is financially shaky," said Catherine M. Leonard of Star Financial.

"That's changing, as more people use factoring for start-up and growth," she said.

Still, "the first question people ask is, 'What's my customer going to think?' " said Wheatley of First Capital.

Does the customer even have to know? At the least, factors usually insist that the customers send payments to them, rather than to the client that sold the receivable. But to the customer, the switch can look like a simple change of address.

Even so, often "the check still winds up going to the client. ... They wind up using it and not paying us back," Greszco's Ernest Zerenner said. "That's one of the risks of our business."

Some national factors have a reputation for hounding clients' slow-paying customers, broker White said. "We won't work with them," he said.

On the other hand, "when bills are 90 days overdue or more, and you have to get your money or go bankrupt, you've got to play hardball. And many a small business person doesn't know how to play hardball," said Holmes of SCORE.

Other factors would rather leave collections to their clients. "It's their customer," Zerenner said.

And some will handle collections – or not. As a client, "you can be as involved as you want to be. You can make the calls, you can customize account collection any way you want to," Wheatley said.

For some of their best customers, banks will make loans secured by receivables. But factors "fill an important niche," said James A. Ladio, Artisans' Saving Bank vice president.

"They're not robber barons, they're not preying on people," he said. "A lot of people have nowhere else to turn, so they turn to factors."