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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.

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.

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