- A big order--what to do?
A clothing company, let's call it Dresses Galore, gets an order for 1,000 dresses. It needs to be filled in two weeks, but Dresses Galore doesn't have cash to buy the cloth. Meanwhile, another client owes Dresses Galore $100,000--but the bill isn't due for 60 days. Dresses Galore decides to sell the receivable on The Receivables Exchange.
- The company prepares for the auction
Dresses Galore sets a minimum bid of $94,000. Because the company needs the money quickly, the CFO sets the auction's time limit at six hours.
- A bidding war ensues
The highest bid is $97,000. The winning bidder, a factoring company, immediately transfers the money to Dresses Galore.
- Repaying the loan
Dresses Galore buys supplies, makes the dresses, and delivers them on time. Six weeks later, the other client pays its $100,000 bill. Dresses Galore transfers the full amount back to the factor, 60 days after getting the cash. Dresses Galore has essentially paid a 3 percent fee for a two-month loan, which is equivalent to an annual interest rate of about 18 percent. It's pricier than a bank loan but cheaper than some credit cards.