Factoring (accounts receivable financing)

Factoring solves a specific cash flow problem: a business can be profitable on paper while waiting weeks or months to actually collect from its customers, and factoring converts that waiting period into cash today, at a cost. It is a working capital tool, not typically the way an acquisition itself gets funded, though it can matter a great deal to what a buyer inherits.

Why it shows up in an SME deal

• A target already using factoring has effectively pre-sold part of its future cash collections, which a buyer needs to understand before assuming the receivables are simply an asset waiting to be collected
• A factor typically registers its own interest against the receivables, which needs to be identified and addressed in any lien search alongside a lender’s general security agreement
• A buyer planning to keep using factoring after closing needs the arrangement re-underwritten in the buyer’s name — factoring facilities are not usually assumed the way a lease sometimes is

What makes a business a good or poor candidate

Factoring works best against receivables from creditworthy customers with a predictable payment history, because the factor is really underwriting the customer’s ability to pay, not the seller’s or buyer’s. A business with heavy customer concentration or a history of disputed or late invoices is generally a harder, and more expensive, factoring candidate.

How it differs from asset-based lending

Factoring involves selling the receivables outright, while asset-based lending involves borrowing against them as collateral while the business retains ownership of the invoices. The distinction affects who ultimately bears the risk of a customer not paying, and it is worth confirming precisely which structure an existing facility actually uses rather than assuming from the marketing name.