645, RE: Commercial credit tightening at banks - here is a solution|
Posted by Phanntom, Sun Nov-23-08 08:36 PM
This is "a" solution but it certainly isn't a good solution. It had it's origins in the clothing business where the purchases are made several seasons ahead of when the goods will be sold. It's been useful in that environment because of the high margins in retail clothing. Now it's very similar to the sub-prime mortgage market. It thrives on new businesses that typically struggle with cashflow, but the HIGH cost of factoring is never considered. Not only that, but factoring tells your customers that you have a financially weak business, and if that customer fails to pay, they get to charge you back for it. Typically, they'll only take your cream accounts...those you get paid timely from anyway so why factor them. I've seen factoring rates as high as 14%/month. I don't care what business you're in, taking 14% out of your profit margin is a killer.
I've tried to find a positive to factoring for the business owner and so far I haven't been able to find anything. If you're business is already suffering, it's only going to suffer more from the high cost of factoring.