Invoice factoring by definition is the sale of a company's receivables, also known as its assets, or invoices, at a discount to a factoring company who pays the business a discounted amount off of the face value amount of these invoices, and then receives payment for the invoices from the company's customers directly.
The practice referred to as factoring has been evolving for over 4,000 years, or since the beginning of commerce. More particularly, it was first used in the day of King Hammurabi of Mesopotamia, also known as the "cradle of civilization" in history books. Historically it was the Mesopotamians who developed writing and they also structured business codes and government.
But the idea of selling promissory notes at a discounted price - another form of factoring - began with the Romans. Then, the first documented use of factoring happened in America some time before the revolution, when animal furs, cotton, and even materials such as timber were shipped from the colonies to Europe. So the Americans can continue to harvest in London, merchant bankers advanced funds to the colonists. Simply put, these factors during the colonial times made advances against the accounts receivable of their clients, the Americans, allowing them to continue with their work. Soon, it was during the Industrial Revolution when factoring became more focused on credit when they assisted clients in determining the creditworthiness of their customers and setting credit limits. It was the factor who could then ensure payments for customers that had been approved, speeding up the process.
Invoice factoring services can be a beneficial resource tool for business owners worldwide, especially during a trying economy. Why? Because obtaining a loan from traditional financial institutions such as banks can be a difficult and slow process. Invoice factoring services from factoring companies provide short-term working capital to growing businesses who often find it hard to get conventional funding.
Since many companies don't get paid right away after they have delivered a product or a service, it can negatively impact their cash flow, making it hard for the business to manufacture new orders. After all, supplies have to be on hand to continue manufacturing the products. Because of this, businesses who do not get paid for 30, 60 or 90 days can truly benefit from invoice factoring services. In what way? Factors advance up to 90% of an invoice total, and they can often provide funding in as fast as 24 hours.
Remember to differentiate factoring from a loan; it's after all, the purchase of a company's assets. And dissimilar from traditional bank loans, factoring involves 3 parties - instead of only two parties. In loans, banks base their decision on the creditworthiness of the company. Alternately, factoring companies look at the value of the client's receivables to make a decision. When availing the services of an invoice factoring company, no minimums, maximums and lengthy application processes are in the picture.
Make spot factoring, a newer form of invoice factoring, part of your business growth strategy today.
This article was added on Saturday 28 November, 2009.
