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investing with factoring companies

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"?
Reply to
researcher
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).
-Tad
Reply to
Tad Borek

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