Success Apparel, a manufacturer of private-label children's wear based in New York City, long ago decided to forgo a traditional line of credit. For the past 15 years or so, the company has met its working capital needs by factoring, or selling its accounts receivable, says Chief Financial Officer Bruce Fine. "This is less expensive," he says, as banks usually calculate interest on a company's entire line of credit, even if the firm is using only part of it.

In contrast, according to its factoring agreement with GMAC Commercial Finance, Success receives an advance against its accounts receivable, paying interest only on money it actually is using. The flexibility of factoring also is appealing; as Success's sales grow, so does its borrowing ability. Finally, by working with a factoring firm, Success can outsource many of its accounts receivable functions. "We don't have to buy software or employ a staff of people," Fine says.

Like Success Apparel, a growing number of companies have turned to factoring. While hard data on volume can be difficult to come by, as many factoring firms are privately held and don't release sales information, indications are that it is increasing. Between 2005 and 2006, the volume of factoring grew by 12 percent, from 1.02 to 1.134 trillion euros worldwide, reports Factors Chain International, an Amsterdam-based network of factoring firms.

In the U.S., factoring totaled about $65 billion in 2006, says Bert Goldberg, executive director of the International Factoring Association, a Pismo Beach, Cal.-based trade group.

Factoring is a type of asset-based financing. A financial institution purchases a company's accounts receivable on either a one-time or revolving basis, says Allen Frederic, Jr., president and chief executive officer with Gulf Coast Business Credit, a New Orleans-based factoring firm. The factor then advances some portion of the value of the receivables to the client, using the receivables as collateral. Once the receivables are collected, the factor pays the client the amount it initially held back -- what's known as the reserve amount -- less the fees it charges.

A factoring company also can provide credit, collection, and accounting services. Because the fees for these services typically are based on the client's sales volume, companies can take what often is a relatively fixed cost and make it variable, says Kevin McGarry, president of GMAC Commercial Finance.

While factoring has been an accepted financing tool in Europe, historically it's had a stigma associated with it in the United States. Factoring firms often were viewed as lenders of last resort, leading some executives to worry that their firms' reputation might be tainted if they used factors. These perceptions appear to be fading, especially in industries such as apparel, where factoring is commonly used, says McGarry.

In fact, factoring is expanding beyond its traditional markets in the apparel, furniture, and carpeting industries. "People realized that the basics of factoring could be adapted to other industries, as long as you have good receivables," says Frederic. This typically means that the products behind the receivables don't have performance or warranty issues that would prompt the customer to return them. The trucking and temporary staffing industries, for instance, have begun to make greater use of factoring.

Moreover, as more companies operate internationally, the need for factoring arrangements grows, says Steve Crowder, chief executive officer with Decorize, Inc., a home furnishings supplier based in Springfield, Missouri. Decorize factored for about five years, starting in 2000. When companies source from around the globe, it takes them longer to convert raw materials to finished goods, then to orders, and finally to cash, because materials and components are in transit longer. In addition, most vendors located outside North America want cash up front -- even if the company here must wait 30 to 60 days to get paid by its customers.

Growing companies also are good candidates for factoring arrangements, since it's often difficult for them to generate cash quickly enough to support the growth. "They often grow at the expense of being able to pay their creditors on time," says Jonathan Freedberg, president of Aberdeen Funding, an Atlanta-based factoring firm. Factoring also is an option for companies operating in industries that don't usually get a warm reception from banks.

Dennis Hauser, president of DCH Roofing in Tampa, typically spends between $4,000 and $10,000 on labor and materials for each residence on which his firm works. Then he has to wait 45 to 60 days before getting reimbursed by the construction company that hired DCH. Given that DCH completed 1,900 roofs in 2006, the gap in timing dramatically impacts DCH's cash flow.

Beginning in 2001, cash constraints limited the company's ability to grow. "As sales grow, costs grow as well," says Tina Hauser, vice president with DCH, which has about 35 employees. "It takes a while to build up cash flow."

Dennis Hauser asked several bankers about small business loans, only to come away empty-handed. "Banks look at roofers and other trades as really bad risks, even though I pay my bills on time," he says.

One banker, however, suggested that DCH look into factoring. The Hausers did, and began working with Hennessey Capital, SE, a Tampa-based factoring firm. David Wolf, president of the firm, reviewed DCH's financial statements, verifying that the firm had legitimate receivables from established construction firms. When they checked out, Hennessey Capital began advancing money against DCH's receivables. The two companies have worked together ever since. Partly as result of factoring, DCH's sales have grown by about $1 million annually, Dennis Hauser says.