Selling privately of receivables: More destructive to the business survival will lack the customers cash flow to produce goods and provide services in a high demand market. Consistent cash flow is the lifeblood of commerce and the catalyst for healthy economies. There are many options available to increase cash flow. Factoring will be well known as invoice factoring or accounts receivables factoring is one of the oldest alternatives for continuing cash flow. Factors, third parties to the transaction between the seller and the buyer, purchase invoices and accounts receivables at a discount. This process allows companies to easily cover production purchases, payroll and other operational expenses without any interruption in their business.
Elements of factoring will be traced back to the Mesopotanians, who are credited with being the cradle of civilization and the first to generate business code structures and government regulations for commerce. Experts have evidence that proves 4,000 years ago, the Mesopotamians also created the concept of factoring. Following Mesopotamia, there is evidence that the Romans sold promissory notes at discounted prices. Roman merchants also enlisted the services of collectors to settle trade debts. But factoring as we know it today got its start in the Middle Ages.
Originally, they will purchase the grain sale rights against the coming harvest. As in any venture, where there is profitability, there is expansion. These early merchant bankers began to advance money against the delivery and payment of grain shipped abroad and to distant trading ports. Soon, the profitability of this endeavor opened the floodgates to a new segment of society and created a new industry within the trade industry of merchants who solely bought and traded grain debt instead of the actually grain itself.
By the time English colonists settled in the new world, America, this type of financing had become common. Both English settlers in the new world and English merchants were in prime situations to make lots of money. Due to the time distance in getting their goods, by boat, from the colonies back to England and vice versa, these merchants could have gone bankrupt waiting on their money. Cotton, timber, fur and tobacco industries all spurned their own factoring segments. Merchant bankers in London advanced funds to colonists for goods and materials before they made the journey across the ocean. They would ship their goods to the colonists or back to England where one of these factors would pay a discounted rate to the seller before the voyage and afterwards take a percentage for selling and collecting the money owed.
Factoring will became a common business practice. Until the 1700s, England and the US shared a common law framework. Originally, English law forbade the selling of invoices unless the debtor was notified in advance. Of course, the United States developed its own government. In the late 1940s United States almost wholly adopted non-notification factoring arrangements and witnessed a boom in factoring in textile industries and transportation industries.
Another type of factoring exploded on the seen with the introduction of credit cards. A credit card is a form of factoring where the credit card company advances the retailer and the service provider the cash before the individual actually pays for the invoice. The retailer and service provider are charged a small fee, but they are spared the hassles of financing the individual on their own and having to wait for that person to pay for their service or product.
Today, the purpose of invoice factoring has not changed. Factoring allows the business owner to operate his day-to-day business without the consequences of cash flow interruption. Factors purchase commercial accounts receivables or invoices from a business at a discount giving the company the opportunity to use and invest that cash right away.
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