Abstract
This paper examines the firm's decision to use factoring amongst a cross‐sectional sample of 655 manufacturing companies using a rich firm‐level database. The paper develops and tests hypotheses that explain this particular choice of credit and financial management policy. We find strong evidence of a ‘financing demand’ explanation for the use of factoring, and also some support for theories which relate the decision to use a factor to the firm's product characteristics, to market characteristics and to the preferences of the factor (supply constraints). The motivation to use factoring, however, appears to be related more to a demand for asset‐based finance from small companies than to firm‐level choices about organisational structure.
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