So per Eddie's rec, I picked up 'How to Get Rich' by Felix Dennis and I've been working my way through. I got to the part where he's talking about cash flow and he strongly advises against factoring to increase cash flow.
What I don't completely understand is exactly WHY factoring is so goddamn awful. He likens factoring to smoking... both lead to death but you do it anyway because the death is so far off. What's the death in this case?
I understand the basic concept on factoring, but I wanted to better understand the risks associated with it and exactly why factoring is so awful for a start up business.
Any monkeys familiar with factoring?
My understanding is that factoring is really just selling trade receivables at a discount. You're basically bringing forward cash flow that you would otherwise collect in due course. If you become reliant on factoring to generate cash flow, then you could end up blowing up the company if your factoring counterparty decides to stop funding, or if your business slows down and you have reduced capacity of receivables to use in factoring.
I don't think it's a death sentence, but it should obviously be used very conservatively.
Check out this website: http://www.receivablesxchange.com/. This is basically an exchange for small business looking for factoring counterparties. Pretty awesome business model.
Yeah, that's my understanding too... but I didn't know why he was so adamantly against it.
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