Factoring: The History of an Age Old Practice

In the U.S. factoring is becomming a popular method of financing, helping to improve the cash flow for businesses. Simply put, factoring is when a company decides to discount its accounts receivables, at which time the factor bears the credit risk for the accounts. Itis the factor who is the recipient of payment from the client's customer. Invoice factoring is among one of the most efficient forms of financing today -- particularly now that we are faciong such tough economic times.

Factoring can be traced back to a Mesopotamian king Hammurabi. What's more, historical documentation about the use of factoring proves that it took place in our American colonies before the American Revolution. This was at a time when raw materials like furs, cotton, timber and tobacco were shipped to Europe. Merchant bankers in London and other parts of Europe advanced funds to the colonists for these raw materials. this way the colonists were able 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 very helpful to the colonists, as they could go ahead and begin their harvesting without waiting for the money the Europeans owed them.

In the past, factoring agreements were on an all or nothing basis where one either factored all of a company's invoices or not. But in recent years, single invoice factoring, also known as spot factoring, has become popular. With single invoice factoring, you are allowed to factor as few or as many invoices as you desire.

What if you 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 the most obvious reason between the success and failure of a small business today.

Is factoring is right for you and your company? Ask yourself if your small business could use factoring to speed up cash flow. If you need to increase working capital so the business can grow, then chances are you could use factoring.

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?

The term "spot factoring" is the same thing as single invoice factoring and it is becoming more common in its usage. Spot factoring refers to the increasingly popular practice of picking your spots, or choosing which invoices, if any, you want to factor. This allows you to retain the most money while spending the minimum fees with the factoring company.

About the Author:

Kristin Gabriel is a writer who works with The Interface Financial Group, North America's largest alternative funding source for small business. The company provides short-term financial resources including accounts receivable factoring and serves clients in more than 30 industries in the United States, Canada, Australia and New Zealand. IFG offers expertise in accounting, finance, law, marketing and banking. www.ifgnetwork.com