Factoring Articles

The Definition and History of Invoice Factoring

Factoring by definition is the sale of a company's receivables, otherwise known as its assets, or invoices, at a discount to a factoring company who pays the business a discounted amount off of the face value amount of these invoices, and then receives payment for the invoices from the company's customers directly.

The practice known as factoring has been evolving over 4,000 years, or since the beginning of commerce. More specifically, it was first used in the day of King Hammurabi of Mesopotamia, also known as the "cradle of civilization" in history books. Historically it was the Mesopotamian people first developed writing and they also structured business codes and government.

However it was the Romans who began selling promissory notes at a discount - yet another form of factoring. Then, the first documented use of factoring occurred in America some time before the revolution, when animal furs, cotton, and even materials such as timber were shipped from the colonies to Europe. Merchant bankers in London advanced funds to the colonists so that the Americans could continue to harvest their new land. In other words, these factors during the colonial times made advances against the accounts receivable of their clients, the Americans, enabling them to continue with their work. Soon it was during the Industrial Revolution when factoring became more focused on credit when they assisted clients in determining the creditworthiness of their customers and setting credit limits. It was the factor who could then guarantee payments for customers that had been approved, speeding up the process.

Invoice factoring services can be a beneficial resource tool for business owners worldwide, especially during a difficult economy. Why? Because obtaining a loan from traditional financial institutions such as banks can be a difficult and slow process. Invoice factoring services from factoring companies provide short-term working capital to growing businesses who often find it difficult to get conventional funding.

Since many companies don't get paid right away after they have delivered a product or a service, it can negatively impact their cash flow, making it hard for the business to produce new orders. After all, supplies need to be on hand to continue making the products. Invoice factoring can benefit a business that doesn't get paid for 30, 60 or 90 days. How? Factors advance up to 90 percent of an invoice total, and they can often provide funding in as little as 24 hours. Keep in mind, factoring is not a loan - it is the purchase of receivables otherwise known as financial assets, from a factoring company. Factoring is different from traditional bank loans because bank loans typically involve two parties, while factoring involves three parties. A bank bases its decisions on a company's credit worthiness. Factoring companies base their decision on the value of the receivables. There are no minimums, no maximums, no long-term commitments and no lengthy application processes when using an invoice factoring company.

Make spot factoring, a newer type of invoice factoring, part of your business growth strategy today.

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