Factoring in the U.S. dates back to colonial times. Historically factoring has been around for more than 4000 years — since the beginning of commerce and trade. Invoice factoring is also one of the most misunderstood financial tools available to small businesses today. But in the United States, factoring is becomming a popular method of financing to improve the cash flow of a business. And in case you still do not understand it — factoring is when a company decides to discount its accounts receivables, at which time the factor then bears the credit risk for the accounts and becomes the recipient of payment from the customer. It is among one of the most effective and efficient forms of financing.
The roots of factoring can be traced back to a Mesopotamian king Hammurabi. Documented use of factoring took place in our American colonies before the American Revolution during a time when raw materials like cotton, furs, tobacco and timber were shipped to Europe. Back then, merchant bankers in London and other parts of Europe advanced funds to the colonists for these raw materials, enabling the colonists to continue to harvest their new land, free from the burden of waiting to be paid later by their European customers. This practice of receivables factoring was quite helpful to the colonists, because they could go ahead and begin their harvesting without waiting for the money.
Factoring agreements of the past were on an all or nothing basis where one either factored your invoices or not, however, recently, single invoice factoring (spot factoring) has become popular because you are allowed to factor as many or as few invoices as you wish.
As an example, you might own your own small business, and even as things are going really well, you wish you could get some additional working capital to move your business to the next level. Whether it’s a one-time need, or an ongoing necessity, working capital or the lack of it, is most often the difference between success and failure of a small business today. How do you know whether factoring is right for you and your small business? It has to be the right time for a small business to use spot or invoice factoring to speed up cash flow, and increase working capital so the business can grow.
While often confused with accounts receivable factoring, which is another way of saying invoice factoring, accounts receivable financing technically refers to a loan agreement between two parties. Factoring is a financial purchase or transaction and involves three parties. The biggest difference is that with a loan it’s your credit that matters, with a factoring agreement it’s your customers credit worthiness that matters.
Just when you thought you had factoring figured out, you hear things like accounts receivable factoring with and without recourse. What does this really mean?
This term “spot factoring” is the same thing as single invoice factoring. The reason that it is called spot factoring, and is becoming more common in its usage, is that it refers to the increasingly popular practice of being able to pick your spots and choose which invoices, if any, you want factored. This allows you to retain the most amount of your money, while spending the minimum fees for adequate cash flow.
To get started or to find out how accounts receivable factoring can grow YOUR business.
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