By Robin Barrett, SVP and Managing Director of Oxford Commercial Finance.
For many CPAs, controllers, partners, and consultants advising closely held or growing businesses, the topic of factoring is often met with a common objection: “It’s too expensive.”
Factoring, also referred to as “working capital,” is a financial transaction in which the business sells its accounts receivables to a third party at a discount, giving it immediate cash flow in exchange.
While working capital or factoring may seem expensive, a common misconception is that many business owners compare it to a traditional bank line of credit, creating an apples‑to‑oranges analysis that ignores how different these tools can be. In providing a loan, banks underwrite historical cash flow or the company’s past performance over time. Strict credit requirements, limited business history, and inconsistent revenue streams, are often factors in businesses getting turned away from traditional banks. Factoring, conversely, underwrites accounts receivable or expected income. While banks look backward; factors look forward.
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Factoring, therefore, is less about cost and more about strategy—and, for some clients, stability, optionality, and growth. When might factoring be a good option for business clients? A number of factors should be weighed, including cash flow.
Hidden Costs of Weak Cash Flow
Most businesses underestimate how expensive poor cash flow can be. While factoring typically has a clear, disclosed fee structure, weak cash flow can often create hidden costs, such as the following.
1. Lost Growth
Business clients may sacrifice margin to win more business when cash is tight, delivering discounts to accelerate payment or preserve volume. Ironically, this lost margin can exceed the cost of factoring. While factoring can compress gross margin, it can also allow a company to accept more orders and support larger customers.
If a client is in a position where they must choose between margin and momentum, factoring might provide fuel to grow without unnecessary concessions.
2. Supplier Strain and Missed Discounts
Stretching payables to deal with cash flow issues may feel like a short-term fix, but it can:
- Damage supplier relationships
- Trigger COD terms
- Eliminate early‑pay discounts that often exceed factoring costs
When evaluating working capital, advisors should work with clients to also assess and quantify the value of supplier goodwill and incentives—two areas where factoring can create positive financial impact.
3. Emergency Borrowing at Punitive Terms
Clients who don’t proactively plan cash flow may end up having to look to a costly option: merchant cash advances (MCAs). MCAs may offer a type of business financing where the company receives a lump sum of cash up front, which must then be repaid through payments of future credit and debit card sales. These products can drain liquidity quickly and for some create a long-term debt spiral.
Factoring, by contrast, is predictable and tied to sales. It enables the business to fund growing accounts receivable (AR) balances intentionally rather than reactively.
4. Management Distraction
Weak cash flow can force owners and executives to shift focus from strategy and sales to covering payroll or negotiating with suppliers. This “firefighting” mentality can slow decision-making and limit bandwidth.
Working capital stability can create mental and strategic space. That, too, has a value which often does not show up on paper.
When “Inexpensive” Capital Becomes Expensive
Traditional bank financing is the lowest-cost option when a business qualifies. But inexpensive capital can also have hidden costs.
Banks underwrite historical financial performance, not future opportunity. As a result:
- A fast-growing company can quickly outgrow its bank line because the credit limit can lag behind revenue growth.
- Banks may require sophisticated bookkeeping, often beyond the capabilities or budgets of small companies with lean accounting staff.
- Financial covenants can limit distributions or bonuses, restricting how owners reinvest in their teams or reward performance.
For companies that lack the infrastructure or track record required by banks, “inexpensive” capital can come with constraints that limit flexibility, growth, and control.
When Factoring or Working Capital Can Make Sense
Factoring can be a forward‑looking working capital tool. For many businesses, it can be a strategic enabler, particularly when cash flow is volatile or growth outpaces internal resources.
It can be the right tool when:
1. The company is experiencing rapid growth – As receivables increase, access to capital can also increase with factoring. This can help to keep liquidity in line with expansion.
2. Sales are seasonal – Seasonal companies often struggle with mismatched cash inflows and outflows. Factoring can help to smooth liquidity across peak and off-peak periods.
3. There is high customer concentration – Banks may avoid concentration risk. Factors might be more open to concentration if the end customer is strong.
4. Customers pay slowly – Banks often make invoices ineligible after 90 days. Factors may extend eligibility to 120–150 days, providing more practical support.
5. The company is in a startup, turnaround, or transition stage
- Startups: Can generate working capital from their receivables even without operating history.
- Turnarounds: Factoring may offer higher AR leverage than banks, supporting companies recovering from financial setbacks.
6. Speed matters – Underwriting may be faster because the factor is evaluating the creditworthiness of the client’s customers, versus the business client themselves. Working capital may be made available quickly and flexibly.
Factoring Isn’t for Every Company
Stable, well‑capitalized, diversified companies with strong financial reporting are often best served by bank credit. Factoring is typically designed for companies experiencing uncertainty—where the cash conversion cycle is difficult to predict, customer payment behavior fluctuates, or liquidity must adjust rapidly.
Questions to ask clients to assess if it might be a fit include:
- What happens if your largest customer pays 30 days late?
- How quickly can you generate liquidity if a large order arrives?
- Can your sales grow if customers demand longer payment terms?
When uncertainty is the norm, cash flow predictability may override a higher rate.
Conclusion
Before dismissing factoring as an option, CPAs and others might consider: What is eroding the business client’s cash flow today? How much is weak liquidity costing in missed opportunities, supplier friction, or team morale? Is having greater certainty more important than price?
Reframing the conversation around true costs, in addition to rate, can help clients to evaluate factoring as a tool. In many cases, the real expense is in the cost of not fixing cash flow.
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Robin Barrett is SVP and Managing Director of Oxford Commercial Finance. She draws on 2+ decades of experience in commercial finance. She is a past president of the American Factoring Association, and an active member of the American Institute of Certified Public Accountants (AICPA), Arizona Society of Certified Public Accountants (ASCPA), and Turnaround Management Association (TMA), and was recognized by ABF Journal as one of the Top Women in Specialty Finance.
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