Factoring is an essential financial tool for companies with
cash flow problems.
wait 30-60-90 days for your customers to pay you? Factoring
allows your company to get the money from its customers now
- not weeks or months from now.
Factoring is converting your accounts receivables/invoices
for cash, thus allowing your company to receive the needed
capital quickly! It
does not require additional collateral and does not create
Factoring is one of the quickest methods for companies to
raise working capital. Used by almost every industry,
factoring allows your company to raise the needed capital
for expansion/growth, restructuring or survival!
More about factoring
The origin of the factoring industry has been traced to the
days of the Roman Empire or even earlier, but the industry
as we know it today in the United States goes back only
about 200 years to the early nineteenth century.
Factors evolved from U.S. selling agents for European
textile mills. The European mills used the agents to sell
their fabrics in the U.S. and paid the agents a commission
on sales. The agents also warehoused merchandise and did the
shipping for their European clients. As these selling agents
prospered and became more familiar with their own customers,
they began taking on the job of establishing credit terms
and advancing funds to the European mills. The oldest
documented factoring firm traced its roots to 1810 and
several others were established in the first half of the
Traditional or old-line factoring is fairly straightforward
and is designed for long-term relationships. It involves the
purchase of receivables without recourse and with
notification to the client's customer. The factor buys the
receivables created by a client's sales and then collects
the proceeds directly from the client's customer. After the
factor buys a receivable, it assumes the credit risk on that
receivable. If the client's customer doesn't pay because of
a credit problem, the factor must assume the loss.
Essentially, an old-line factor offers its clients credit
protection, collection, bookkeeping services and financing.
In addition to advances against receivables purchased, once
a relationship is established, factors often provide clients
with over-advances during peak shipping seasons. Factors
also offer financing services and accommodations such as
inventory loans, letters of credit/import financing and
equipment financing. Export financing is also available
through alliances with international factoring networks.
Principally because credit guarantees are important in
textiles and apparel and because of factoring's roots in the
textile industry, about 70 percent of the volume of old-line
factors is still in textiles, apparel and related
the factor takes the credit risk on the sale, it must first
approve the sale through its credit department. Thus, the
client is relieved of the cost of running a credit
department. Because of the credit guarantee, old-line
factoring is limited to industries in which credit
information is available. The charge for the credit and
collection service, called the factoring commission, varies
with the sales volume of the client, the size of the
transactions and competitive conditions.
economic rationale for the factoring service is fairly
obvious. With thousands of suppliers selling to the same
customer, without factoring, each seller would have to do
its own credit appraisals and collections. This involves an
incredible duplication of effort. With factoring, a single
credit department operating for hundreds or thousands of
suppliers, eliminates much of the duplication and promotes
efficiency. And with the aid of electronic data processing,
the cost of the credit and collection operation has been
reduced exponentially and the savings are passed on to the
client. Technology has revolutionized the industry,
eliminating tons of paperwork and providing clients with
valuable on-line information. The system can generate a host
of reports on sales analysis and other information to help a
client analyze its own business.
should be noted that the factor's guarantee, is a credit
guarantee and does not apply to anything other than the
financial inability of the client's customer to pay. The
guarantee does not apply to merchandise disputes between the
buyer and the seller. If the receivable is not paid because
of buyer claims of defective merchandise or untimely
delivery or any other dispute involving the merchandise or
its delivery, the factor will look to the client (the
seller) for reimbursement.
credit and collection service is just half of the business
of the old line factor. The other half, and for many
clients, the more important half, involves advances of funds
against the purchased receivables. If the customer wants a
cash advance, it can borrow from the factor. The interest on
the loan is in addition to the commission and is usually at
a rate competitive with the cost of a comparable bank loan.
factoring clients are maturity or non-borrowing clients.
They wait until the purchased receivables are paid and then
may collect the proceeds from the factor. If the client
leaves the funds with the factor after collection, the
factor will pay interest on the balances at a rate
comparable with the factors' cost of funds. These balances
may be drawn upon when needed.
Traditionally, factoring was done on a notification basis.
The client's customer is notified that the account has been
turned over to a factor and the customer's payment should be
made directly to the factor. However, a non-notification
agreement can be worked out. The factor would still purchase
the receivables outright after doing the normal credit check
of the customer, but the customer wouldn't be notified that
its account has been sold. If the client borrows money,
customer payments in non-notification accounts are usually
sent to lock-boxes which the factor administers.
from old-line factoring, there are as many variations on
factoring as there are entrepreneurs who choose to use the
name. There are commercial finance companies, some of which
call themselves factors, single-invoice factors, purchase
order factors, recourse factors, invoice discounters and
Commercial finance companies do not provide credit
guarantees, but lend against collateral, principally
receivables and inventory, and are an offshoot of the
factoring industry and go back to the beginning of the
twentieth century. Largely because the commercial finance
companies operate in diverse industries in contrast with
traditional factoring which is still largely married to
textiles and apparel because of the need for credit
guarantees in those industries, it has grown much more
rapidly than traditional factoring. Rather than purchasing
receivables, commercial finance companies take assignments
of receivables as collateral for loans. The client collects
the receivables proceeds and uses the funds to pay down the
loan. Defaulted receivables are the client's problem (but
could be the lender's problem if defaults are substantial).
The lender normally provides enough of a cushion so that if
the client fails to repay the loan, the collateral can be
liquidated and provide full payment.
Single-invoice factors provide essentially the same
services as the old-line factors but they do it one invoice
at a time. Also, there are very few non-borrowing clients
for single-invoice factoring because a company that factors
a single invoice usually is motivated by the need for
While factors finance receivables after they are created,
purchase-order factors provide financing so clients can fill
orders that they cannot finance on their own. Once the order
is filled and is converted to a receivable, a traditional
factor might purchase the receivable and cash out the
purchase order factor.
Recourse factors are usually small factoring companies that
purchase receivables often in non-traditional industries
where credit information is not readily available. They buy
the receivables but those that are unpaid are charged back
to the client.
Invoice discounting is similar to the recourse factoring and
is prevalent in England and some other European countries.
The invoice discounter buys receivables, but rather than
focusing on the credit worthiness of the client's customer,
they concentrate on whether the contract creating the
receivable allows sale or assignment. Non-paying receivables
are charged back to the client.
Re-factors provide the same services as old-line factors,
but they work with small companies, sometimes with sales
volume as low as $500,000 (generally large factors need at
least $3 million in volume). The re-factors provide the
financing, but use the services of traditional factors to
handle the credit checking and credit guarantees. They make
their money from interest on money advanced and a spread
between the re-factors commission cost and what it charges
its own clients.