Factoring can be an attractive alternative for companies that need to improve their cash flow but don’t have access to bank financing or don’t want to increase their debt load, such as small, newer companies and rapidly growing firms. The factoring firm typically charges a commission fee on the receivables. The business then can receive an advance on the receivables and is charged for interest on the advance.
The key advantage is that the business doesn’t have to wait 30 days or longer for its customers to pay for the goods or services. The business now has access to cash to meet current needs, such as payroll or other operating expenses.
Another advantage of using a factoring firm is the expertise they have in evaluating the credit quality of their customers. Companies also can save money by downsizing or eliminating their credit and collections staff.