Bank loans have been harder to come by, but that doesn’t mean companies’ need for funding has dried up. To get cash, small and medium-size businesses have increasingly turned to firms that get them money they are owed more quickly.
The firms, known as factoring companies (from the Latin word for “to do” or “to make”), say they are seeing an uptick in the quantity and caliber of businesses coming to them for funding.
Traditionally used as a kind of short-term cash bridge, factoring has been avoided by some businesses in the past because it can cost more than traditional bank financing.
But these days more firms that need funding — ones that are growing quickly, are working out financial difficulties or have no assets to borrow against — are selling their bills to factoring companies.
Even businesses with government contracts — generally considered solid lending risks in the past — are finding banks much more skittish.
Factoring allows companies to get money they’re owed faster than they otherwise would. If a vendor usually must wait 60 days to receive payment but wants its money promptly, it can sell the bill to a factoring company. Factoring companies generally work one of two ways: Some pay upfront, giving the vendor the amount owed minus a fee that at many companies is 5 to 6 percent. Others pay a percentage upfront — say 50 percent — and then the rest, minus a fee, when the bill is settled.
Photo by kgdsgn.