Receivables financing: You have more options, but costs are up.

You’ve got more options than ever to convert receivables into cash. But you should consider those options carefully, says Bruce Barren, who advises mid-market firms on capital formation. Costs are up. And lenders want more guarantees, There are three types of receivables financing: factoring the receivables by selling them at a discount to a factor borrowing on the receivables by pledging them to a lender, or prior to the actual creation of the receivable, using the purchase order and underlying inventory as collateral on a loan. These days factoring is almost always "with recourse," meaning that if the receivable becomes uncollectible, you’ll have to make good. In essence, you guarantee collection. So it may not be as good a deal as it used to be. Factors also often won’t take receivables from companies with too many trade discounts, merchandise returns or concentrations in certain accounts (like the U.S. government). And if a factor does take the risk, it will often demand additional collateral such as personal guarantees or additional pledged assets.

If you don’t use a factor
Borrowing against receivables will save you about 2% over a factor - more if you have a good line of credit from your bank. But the receivables must have a solid credit history, usually at least three years. Borrowing against a purchase order is becoming more popular. It can be one way to generate a lot of cash fast (to ramp up production, for example). But you must have an ongoing relationship with the lender.