By Anthony Burke Boylan -- 

Some banks don’t seem to have any money to lend right now – or at least none they want to - and equity markets aren’t a great value proposition for many companies with investors skeptical about, well, everything.

Yet business needs to go on. Companies still need to buy goods, meet payroll, cover seasonal adjustments and even seize market opportunities. So what are they to do?

More and more are turning to factoring; an alternative to asset-based lending that provides businesses with capital when needed and dates back to the Roman Empire. Factoring is not lending, but rather the purchase of accounts receivable from a business.

Let’s say a business has $50,000 in accounts receivable expected, and depending on the business and the industry it might be weeks, months or longer before it’s in hand. Yet they have an immediate need to cover an expense, buy new inventory or tackle a wide variety of new business prospects.

Traditionally they might have gone to a lender with which they have a relationship and gotten a loan backed with the expected revenue. Those loans are much harder to come by these days.

“We are seeing clients who are highly bankable and traditionally would have gone to a lender,’’ said Sol Roter, CEO of Liquid Capital Corp., a factoring company that franchises in the United States and Canada.

Instead, Liquid Capital or another factoring company would buy the $50,000 in accounts receivable for about 75% to 85% of value – sometimes in as little as three to five days. Once it collects the accounts, it pays the balance to its client, minus a fee.

New loans generated by the nation’s largest banks plunged more than 23% since the fourth quarter of 2008, according to data from the U.S. Department of Treasury. Meanwhile, Liquid Capital Corp. has seen business increase more than 20% in just about the same period. (http://online.wsj.com/public/resources/documents/st_LENDING0904_20090417.html

It’s still a small industry and no U.S. data is kept on the overall amount of factoring. But an international trade association reports that factoring is up worldwide, in many cases as a hedge against fluctuating currencies in international trade.

Traditionally factoring was used mostly in manufacturing, but more and more service providers are turning to it as an option, especially as their customers have become slower to pay in the financial downturn.

One success story from Liquid capital is a nurse staffing service. It had an opportunity to double its business, but was turning clients away because it was short on capital due to the 45-day lag time in getting paid by the state. 

Liquid Capital provided a $50,000 factoring line that allowed the company to grow without having to worry about slow payments from the state. 

Factors have fought a stereotype for years, one that assumes they are a last resort or the business equivalent of payday lending. Yet asset-based or asset-backed lending is a specialty area for banks and isn’t cheap. In addition, getting money from a factor doesn’t make a company beholden to any banking covenants.

Factors provide an extensive package of financial management services that includes processing and ledgering of accounts receivable, credit review and assessment, professional collection services and preparation of reports, including online access to accounts.

In better times many factoring clients do “graduate’’ to bank lending. But factoring often is the only option for young companies that don’t have established banking relationships.

Roter says some of his clients choose to continue to use factors for credit and collection services alone, with many businesses finding it more efficient than creating their own departments.

Each company’s cost of factoring is based on their risk, industry and market position. While critics say it’s more costly than lending, Roter has an observation about that.

“If you have a chance to grow your business and you don’t have capital available, your competitors can take your market share or you can miss a growth opportunity or you can miss a payroll.

“If that’s the case, you tell me what capital is worth.’’