Factoring

The Breakdown

Pros

Factors provide a valuable service to companies that operate in industries where it takes a long time to convert receivables to cash
No collateral required
Retain ownership of business

Cons

Relatively expensive form of financing
Short-term solution, generally companies factor for two years or less

A factor is a financial intermediary that purchases receivables from a company. It is essentially a funding source that agrees to pay the company the value of the invoice less a discount for commission and fees. The factor advances most of the invoiced amount to the company immediately and the balance upon receipt of funds from the invoiced party.

Because factors extend credit not to their clients but to their clients' customers, they are more concerned about the customers' ability to pay than the client's financial status. That means a company with creditworthy customers may be able to factor even if it can't qualify for a loan.

Click Here for a list of companies providing factoring services to small businesses