Many businesses that have to pay bills, before customers pay their
accounts, use factoring as a way to even-out the company�s cash
Factoring is when a company sells its accounts receivables to a
third party (called a factor) at a discount, for an instant cash
This option is useful to some fast-growing companies which outstrip
their liens of credit, or new businesses that can�t qualify for
traditional financing, or those that want to pay their bills quickly
to take advantage of discounts.
However factoring can be expensive. To begin with, you only get 75%
to 90% of the value of your receivables. Then there is typically a
2% to 6% discount fee, plus if your receivable takes longer to pay
that fee usually increases. Some factors will also tack on other
charges, such as audit fees.
While factoring is certainly a possibility for some companies, it�s
not the answer for everyone. Factors prefer working with firms that
do at least $20,000 in monthly billings. Because a steady cash-flow
stream is always desirable, it�s wise to spend some quality time
with your trade broker to maximize the opportunities for paying as
many of your bills on trade as possible.