Factoring, which is the selling of accounts receivable from a business to a bank or other institution, is a common practice in many businesses. The advantage of factoring is that it allows a business to receive their money more rapidly than would otherwise be the case. The bank pays cash for the accounts immediately, minus a specified percentage. Therein lies the disadvantage. The percentage charged by the lender for this service takes some or all of the profit out of the transaction for the original firm. For this reason, it is not advisable for small firms with limited resources to do this on a long-term basis. Occasional factoring to speed up cash flow could be advantageous for the small firm.
I have recently become aware of a growing trend in the funeral home industry which involves factoring. Many people have insurance policies that cover their burial expenses; the person dies, everything is covered, the services are rendered, and the family is relieved that their loved one's last wishes have been fulfilled. However, from a business standpoint, the funeral home has performed these services using the resources of the business. Insurance companies typically do not pay the burial benefits to the funeral home for one to six months after the person has died. So companies have emerged that will buy these insurance policies from the funeral homes, pay them the money immediately, and collect an average 4% fee for doing so. For funeral homes in smaller or disadvantaged markets, this is a valuable service that has become increasingly popular.
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