I understand that factors invest private money. Is there a way to
invest with factors for increased income.
======================================= MODERATOR'S COMMENT:
Do you mean "invoice factoring" and/or "accounts receivables factoring"?
For those who aren't familiar with it - factoring is where a company
sells its receivables at a discount, to the factoring company. You get
your cash immediately and don't need to deal with collections. When/if
they collect, you get the balance, minus the factor's cut.
The initial discount is typically large, with an implicit interest rate
way higher than bank financing (e.g the discount could be something like
20%+ for short-term receivables, though what you actually pay depends on
the time to collect, factor's cut, etc.). The reason for the discount is
that a) the factoring company takes on the risk that your customers
won't pay and b) those receivables are likely to be riskier than
average, because you're using factoring instead of bank financing, CIT
Group, SBA loans, investors, etc., to finance this stuff.
Small, fast-growing companies might resort to this because they don't
have enough cash flow to keep their inventory flowing in and need quick
money. But it's also possible a company is resorting to factoring
because all of these other financing sources have refused to give them
money. Or, the business is an outright fraud and the factoring company
is buying junk receivables from nonexistent customers. Etc etc - the
factoring company has to assess all this.
On the riskiness scale, investing in a factoring company is way up
there...so applying the general rule, if you're asking about it on MIFP,
it probably isn't for you. And if you're considering it, see a lawyer
and CPA in your area who know how to evaluate private placements
(assuming this is done via a private company).