Learn All About Accounts Receivable FactoringAccounts Receivable Factoring: What Is It?The most basis definition: Accounts receivable factoring is the process of selling a business’ accounts receivable to a finance or factoring company, at a discount, in exchange for receiving the money immediately instead of having to wait 30, 60 or 90 days to be paid by the customer. In other words, to quickly receive payment for its invoices, a business will sell those invoices to a third party and let them worry about the collections process. The factoring company assumes the risk on the receivables and provides quick cash to the business. The amount of value assigned to the account depends on the age of a receivable. A more current invoice will pay more. Accounts receivable over 90 days typically are not financed. That’s factoring in a nutshell. However, there are many more details we will cover on this site. NOTE: For ease of understanding, we use the terms invoice factoring, invoice discounting, accounts receivable factoring and accounts receivable funding interchangeably throughout the text. They all involve selling your business’ invoices to a factoring company at a discount. Though factoring is an extremely common business practice in Europe, many American business people have never heard of or used it. Many businesses make ends meet by selling their invoices to a factoring company. In short, the process is somewhat like a cash advance. With its roots dating back to the beginning of the 20th century, factoring has now become a billion dollar global business that continues to grow on a daily basis. This growth is fueled by the many large corporations that consider factoring to be the most logical form of business finance available. Many companies in various industries use factoring monthly, while many other entrepreneurs are not even aware of the fact that they can obtain fast and immediate cash by selling their outstanding invoices. Many businesses have found that factoring is probably the easiest form of capital available to small and mid-sized companies. The main reason: factoring companies are not considered lenders. As such, they are not restricted by government or banking regulations. Therefore, factors can be flexible in their dealings with business owners and can fund their transactions immediately.
History Accounts Receivable FactoringFactoring (or accounts receivable funding) has had a very long history. It is one of the oldest business practices known to man. In fact, it has been around since Antiquity (the early Greeks and Romans) when sea merchants would use collectors to settle trade debts. Early Europeans brought factoring to America as soon as the Pilgrims landed. Early American businesspersons used factors to sell cotton, indigo and tobacco abroad. They shipped goods to England where factors took a percentage of the sale for collecting monies owed; English merchants would use American factors in the same fashion. Without factors, merchants would not have been able to maintain a steady cash flow and overseas trade would not have expanded as rapidly as it did. Therefore, factoring was one of this country’s founding means of financial transactions. From these early merchant factors, a group of approximately 40 large factoring companies emerged. Based primarily on the east coast, these companies played a major role in financing the growth of the textile and transportation industries from the 1920s through the early 1950s. In essence, it was factoring which grew and prospered these industries. Starting in the mid 1950s, smaller businesses started using factoring to eliminate their cash flow issues. This move took the factoring industry out of the exclusive realm of big business and proved to be a very good move for the future of factoring. As smaller businesses began to make use of factoring, the industry grew rapidly and became much more competitive. However, beginning in the 1970s, a large number of mergers took place in the factoring industry. By the end of the decade, there were only10 large factoring companies left in the country. As the American economy began to grow again, factors were able to increasingly concentrate on providing businesses the cash flow they need to grow. Starting at this time, banks and other large financial institutions began to also offer factoring services. The business of factoring then became mainly the province of large, institutional organizations.
Next PageLooking for an accounts receivable factoring quote? Need help finding the best factor for you? Are you unsure of what to do next? Confused? Need help? Then, you have come to the right place. At learn-about-cash-flow.com, we are here to provide you the help and guidance you need. What's your next step? Simply, click on the link below.
CLICK HERE to get help with accounts receivable factoring.
Subscribe to the
|
