Chapter 10
Factoring
Essential Idea: Raise Money by Selling Your Accounts Receivable
Let's say that Bobblehead Co. makes custom wooden bobbleheads that it wholesales for $10 each. One day, Bobblehead Co. gets a large order for 5,000 bobbleheads from e-Commerce Corp. Bobblehead spends a few weeks, makes the bobbleheads, and delivers them to e-Commerce Corp. on June 1. Bobblehead is now owed $50,000.
That same day, Bobblehead gets another large order, this time from Super Co. The problem is that, because e-Commerce Corp. has a policy of paying its bills net 30, Bobblehead Co. has not received the $50,000 it is owed and therefore, it does not have the capital on hand that it needs to buy the materials to fulfill its order for Super Co. on time. If e-Commerce Corp. does not pay Bobblehead for another 30 days, Bobblehead will lose its super sale to Super Co.
What to do?
Factoring to the rescue! Factoring is the selling of a business's accounts receivable to a third party in order to obtain immediate funding. Often the money can be received within 24 to 48 hours. In this case, Bobblehead Co. can sell to Factoring Co. the $50,000 it is owed from e-Commerce Corp. and get paid right away. It will then have enough money to fulfill its order to Super Co. (and even better, you won't have to read any more silly made-up company names)!
Whereas factoring was once a sort of exotic idea, these days it is a commonplace way for businesses of all kinds to get the capital they need without having ...
