A recent Entrepreneur.com article has some excellent tips for small businesses about managing cash flow through factoring.
The article concedes that factoring is a great way for some businesses to get cash without going into debt. What most concerns factors is the credit worthiness of the end customer, not the business or its owners.
The reason many businesses make this move is to ensure the continuous flow of cash to the business. Essentially, businesses who use factoring are focusing on having most of the money now rather than all of it later. It can take time to collect on an invoice, so when a company finances its accounts receivable, they are getting their money faster and without the hassle of the collection process.
With small businesses, it is even more important to free up working capital through factoring. The money can be invested into new equipment, used to pay bills, or used toward payroll. Of course, the alternative is to chase the customer for the invoice payment and defer everything else while the money is tied up in the collection process.