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The Post-Banking Loan

Factoring--an expensive way to get cash fast--is on the rise. But before you take the money, take a hard look at the deal.

This story appears in the May 2010 issue of Entrepreneur. Subscribe »

Say you're a young startup--growing fast, but with little-to-zero positive cash flow--and you're straining to reach the next level or just to get through the end of the month. The bank-financing drought is showing no sign of letting up, and of course credit lines are reeled in tight.

What's the answer? For a growing number of startups, it is factoring. The practice involves a financing company, or "factor," advancing you money based on its buying your receivables at a discount; your customers pay the factor the full value later, when the bill is due. Factoring gets you cash in hand immediately--but at a steep price. Factoring fees are much higher than interest rates charged by a commercial bank. Fees are quoted by the month, so a typical 3 percent fee is actually the equivalent of a 36 percent annual interest rate.

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