Factoring refers to a practice whereby you sell your receivables for a discount before they are due. Historically, factoring has been more heavily used in some industries, such as the garment industry, and less in others. Today, however, entrepreneurial factoring companies are willing to buy creditworthy receivables from just about any industry.
Factoring is a relatively expensive means of obtaining financing. You are paying for the cost of the capital, the extra risk (including bad debt), and the paperwork that factoring requires. If you can finance your business through other sources, particularly the more traditional ones, you will certainly save money. However, factoring can be a cash bonanza to a growing business, especially one that cannot obtain the necessary capital through traditional borrowing. Still, if possible, I’d choose a cheaper route, such as trying to finance my receivables through a bank. But even if the bank turns you down, factoring may still be a possibility.
Once you are dealing with a factor, make sure you realize that these are asset lenders, and that you are less likely to get the flexibility from them that you would from a bank.
Takeaways You Can Use
- Factoring is usually an expensive means of financing.
- However, if you have limited access to capital, factoring receivables may make sense for you.