By Karen E. Klein

Q: I'm the co-founder of a two-year-old company in need of cash flow. We sell medical diagnostic test kits through local and national distributors and are looking for an asset-based line of credit.

Our accounts receivable total about $100,000, with a 99% collection rate within 60 days. Our inventory usually stays in the $60,000 to $80,000 range, and our product line is growing. What's the best place to look for funding?
-- A.H., Boca Raton, Fla.

A: First off, congratulations! Experts say that getting 99% of your receivables paid in full within 60 days is a terrific collection rate and should greatly enhance your cash flow. It sounds as though your company is simply growing faster than your revenues, and you can't afford to pay cash for new lines of credit.

This is not such a bad problem to have. With your assets and receivables, your business should be eminently bankable. Once you get an initial bank loan or line of credit, you'll likely qualify for additional loans as long as things continue to go well for your firm.

LEVERAGE RELATIONSHIPS.  Howard Applebaum, executive vice-president and chief lending officer with Sterling National Bank in New York City, suggests that you opt for either a bank loan collateralized by your assets and receivables or a small-business revolving line of credit.

Applebaum, who favors the small-business line of credit option, suggests that you approach a local bank, preferably the one where you bank personally. "That bank would be more inclined to work with you, relying on how you have maintained your personal banking. Use that to leverage a business banking relationship," he recommends.

Small-business loan applications are usually credit-scored based upon many criteria, including how you personally handle your banking and the credit extended to you over the years. Securing an initial loan may require a lengthy approval process, but it will get easier in the future, according to Applebaum.

FEAR NOT DEBT.  "It's no different from when you applied for your first [personal] credit card," Applebaum says. "No one wanted to be the first [to extend you credit], but once you got the first one, your mom or dad instructed you to pay your bills on time and certainly not buy more than you can afford to pay back."

With small-business lending, however, making the full payment on your loan every month may not be the smartest way to go, especially if you're hoping to qualify for more credit in the future. Unfortunately, experts say, credit scoring hinges on overall debt outstanding and how it's managed. Keep in mind that paying off the complete bill when it comes each month does not build up your rating and high scores.

Your other funding choices include vendor financing (either voluntary or involuntary) or using a finance company, says Tom Stewart-Gordon, a longtime small-business consultant based in Dallas. Both Stewart-Gordon and Applebaum, however, suggest that you stay away from financing companies and factors, who buy your accounts receivable for a percentage of their value and pay you immediately.

LAST RESORTS.  Both options carry financial burdens that can eat away at your profits. "This will be an ongoing problem, and the factor's bite will make factoring a self-perpetuating cost of doing business," Stewart-Gordon says. "Also, it's not likely that you'll get your money any faster than you're already getting it, with your collection rates."

Judging from the information about your company, however, you shouldn't have to resort to such arrangements. Continue to handle your resources responsibly, and you'll have no problem securing a favorable credit arrangement or keeping that cash flowing in.

Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.