There is only one absolute criteria for considering a factoring relationship:
Do you have collectable and creditworthy invoices to sell?
Factoring is the process of purchasing commercial accounts receivable (invoices) from various businesses (clients) at discount prices. Standard business practice in today's world dictate that in order to get business, as a provider of goods and services, companies must extend terms to customers. These terms can squeeze the life (cash) out of a struggling or emerging company.
How Does Factoring Help? Instead of waiting 30, 60, or even 90 days to receive payment for services (or products) that have already been rendered, a factor will buy the invoice at a discount and you will:
- deliver the goods or services
- generate an invoice
- and the factor will pay you immediately.
How is Factoring Different From Financing?
Factoring is not a loan. It is the purchase of a debt instrument at a discount. The factor purchases the invoice and collects from your customer. This is not the same as accounts receivable financing, which is typically the bank's method of using unpaid accounts receivable as collateral for loans
Where Did Factoring Come About?
Factoring dates back 4,000 years to the days of Hammurabi, the king of Mesopotamia. The Mesopotamians were the first to put structure into business code and government regulation, as well as, come up with the concept of factoring. Almost every civilization since the Mesopotamians that has valued commerce has practiced some form of factoring. The Romans were the first to sell actual promissory notes at a discount. The first widespread use of factoring occurred in the American colonies before the revolution. The "factors" of colonial times made advances against the accounts receivable of clients long before they had been paid for what they sold. With the Industrial Revolution, factoring became more focused on the issue of credit. By helping clients determine the creditworthiness of their customers, factors could actually guarantee payment for approved customers. This is known as non-recourse factoring, and is very common in business today. After the war years, factors saw the potential to bring factoring to their forms of invoice-based business and the expansion began.
Today factors exist as divisions of large financial institutions, or as individually owned and operated entrepreneurial endeavors. This year, thousands of businesses will sell billions of dollars in accounts receivable, and they are doing it for profit, growth, and survival. If your business needs cash flow, factoring may very well be the answer.
Factoring is offered by these branches: Illinois, Florida, England