Coping with the Credit Crunch — To Factor or Not to Factor?

A recent piece in the WSJ offers a number of suggestions for small and medium-sized businesses to deal with the credit crunch. In the article, the authors propose that factoring, "where a lender might, say, outright give a borrower 80 cents on the dollar for the company's accounts receivable, can be a good option for businesses like manufacturers that are owed a lot of money by customers and that have no better lending option right now." But is factoring a good deal? If you think so, I've got a friend in Vegas who can offer you better odds at the blackjack table. Without question, factoring is an option of last resort -- corporate loan-sharking more in line with the time of Dickens than the modern world.

A better option -- for suppliers working with more sophisticated buying organizations -- is to take advantage of dynamic discounting and supply chain finance programs that offer more attractive and flexible interest rate options. Unfortunately, however, adoption for these initiatives reaches less than 10% of the market by my seat of the pants analysis. Still, I suspect that the current economic environment will encourage many companies to invest in the area to reduce supply risk, provide greater payment flexibility to suppliers and to profit from the downturn based on their own credit rating and size while letting banks into the equation to avoid any impact on working capital. So, my friends, the answer is clearly not to factor -- unless your back is against the wall and your customers can't offer any more sophisticated options that accomplish the same thing at less expense to you.

- Jason Busch

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