The word “factoring” is a mathematical process known and used in solving many different polynomial equations intended to simplify. However there is another definition for the word “factoring” when not referring to the term in math. It is a financial service whereby a factoring firm advances funds for expected payment to a business.The business sells or transfers title to its accounts receivable to the factoring company.The seller’s customers remit the payment directly to the factor, or on a non-notification basis, where the seller remits to the factor and handles the collections.
Since the beginning of civilization, the business term of factoring has been around for many centuries (4,000 years) in various forms. It was first used by the Mesopotamians in their business dealings. The Romans used a type of factoring by selling discounted promissory notes to a secondary market. But factoring really gained in popularity tremendously was between the American colonists and merchants in Europe when the colonies sold raw materials to European merchants who paid the colonists in part for the materials. Factoring was like an advance with which the colonists could continue their operations, and factoring eased cash flow.
At about the time when the American Revolution took place, factoring changed. The concept of credit became more important – not the credit of the company itself but rather the credit worthiness of its clients …for better cash flow. Some typical factoring solutions include export factoring, which is offering factoring services for companies who export from the United States and Canada; inventory financing, a solution promoting a company’s growth by funding them when they must expand and purchase inventory; as well as P.O. Funding, to finance purchase orders when a company receives a purchase order and needs to purchase supplies to fulfill the order.
Factoring companies do not always expect to buy 100 percent of a company’s receivables, and there are no minimum or maximum sales volume requirements. In fact there is a new form of factoring called single invoice factoring where just one invoice is factored.
Professional rates from a factring compnay are competitive because each client’s circumstances vary, and this may have an impact on the fees charged. Factoring allows choices of invoices to be factored, enabling customers to retain most of their money, to guarantee adequate cash flow while spending the minimum fees.
The Benefits of Factoring
The main advantage of factoring is that it provides you with upfront cash rather quickly. You do not have to wait days, weeks or even months to get approved as you do for a traditional business loan. In many cases, it takes only a few days to set up a factoring arrangement, and once it is set up, you can usually get your money by the next day.
Factoring also does not require that you continually re-apply to get more money. Once an arrangement has been reached, you can sell your invoices to the factor again and again without the inconvenience of being approved each time. Basically you get you money more quickly.
It can be a great way to improve your company’s cash flow and ensure that you have the funds you need to keep operating your company.
Before the 1930s, the most popular industries for factoring were the garment and textile industries. These are industries that rely on raw materials. In order to make sure that companies could continue to buy raw materials to produce clothing and textiles, factoring was used. it soon became evident, after World War II, that factoring could work effectively for any business that invoiced othersv.
When interest rates were on the rise and banks were increasingly regulated during the 1960s, 1970s and 1980s, companies had a hard time getting traditional financing – much like it has been since the recession started in 2008. Factoring grew popular then, and it is growing popular now. Banks do intensive credit checks when providing a loan, whereas factoring firms do not – What they do is to focus on checking the credit of those who owe the business the money. Invoices are purchased, minus a fee – making it possible to avoid interest charges. Small business, startups and rapidly growing businesses benefit most from factoring.
Today, almost any business with good customers and outstanding invoices can benefit from factoring, and it continues to be a viable alternative to traditional financing such as loans, and credit cards.
Kristin Gabriel works with The Interface Financial Group (www.IFGnetwork.com.) The company provides short-term financial resources including construction factoring, serving clients in the United States, Canada, the United Kingdom, Singapore, Australia and New Zealand. IFG offers factoring, accounting, finance, law, marketing and banking.
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