If you are
short on cash, opting for a factor may be a very appealing option. Many stores don't mind credit card payments, despite the 3% fee, because it gives them instant cash, and also avoids the problem of bounced checks. For this "service," credit card companies
charge an approximate 3% fee to the business. The factor will buy the invoice from you at a discounted price, perhaps for $45K, and will collect the $50K at a later date thus making $5K themselves. . Today, you may pay that same bill with a credit card. Cash is king, and the
option of having cash instantly at a fee-based price may be very appealing to business seeking to raise capital in the short term. As a result, the grocery store only receives $97 dollars, but it has the funds right away. Although the
business model is slightly different, the underlying concept is still that of a third party factor. Bounced checks are basically accounts receivables that never get collected, and simply cost your business money in the long run. For this "service" however, the third party will charge you a
respectable fee by discounting the receivables market value. Thus, the grocery store receives the money instantly, and not 7 days later. Likewise, if you operate in an industry with a long receivables turnover ratio, and have a substantial account receivables balance, third party factors may work wonders for your cash flows.
