A factor, sometimes known as a “funding source” or a “debt buyer”, can provide financial assistance to businesses that are expanding and require an infusion of capital to further stimulate growth. This can be accomplished without the typical restraints usually associated with a traditional financing source. Generally speaking, through factoring, businesses can acquire necessary growth capital without accumulating additional debt.

This is because factoring is actually a process whereby either invoices(generated business to business) or consumer receivables(generated business to consumer) are purchased by a funding source at a discount. It is important to note that the operative word is “purchase”. Because the funding source purchases invoices or consumer contracts from their clients, the client is actually selling something they own(in this case their invoices or consumer contracts) rather than attempting to qualify for a loan or line of credit.

The factor or funding source’s role is to fill a gap in time . . . the time between when a seller sales a product or service, and the time a customer or consumer pays the bill. The fee charged for this service is termed a “discount”. The service which is provided by the funding source is a service which derives its significance from “the time value of money”. Any entrepreneur understands that if they can receive payment for their product or service sooner rather than later, they stand to become more profitable relevant to how quickly they can be paid.

But what is the genesis of factoring? For some who have only recently heard of factoring, or “accounts receivable financing” as it is sometimes known, it would be somewhat surprising to learn that this financial procedure has a history going back thousands of years. Although some believe the Phoenicians used a somewhat primitive form of factoring, the Romans may have been the first to pass on promissory notes at what we today would know as a discount. The Pilgrims who first came to these shores financed their venture through what we today would most likely recognize as a factor.

Factoring continued to play a significant role in the life of America even after the Pilgrims. For example, the colonies regularly sent furs and timber and other raw materials to a factor in London. The factor sold the raw materials of the colonists, as well as guaranteeing the credit of the colonial buyers. The factor would also collect the debts owed to London merchants, who in turn exported the refined goods to the colonies. Factors frequently made advances against the accounts receivable of a client, just as they do today.

After the Industrial Revolution the role of the factor began to change. The factor became more of a credit-servicing agent or banker. Factors at that time would, for example, help their clients to investigate and approve prospective customers. Then the factor would purchase his client’s customer’s accounts receivable, and would do so without recourse. Likewise, the factor would also advance cash against their client’s receivables. It is generally believed that the first independent finance company not associated with a bank was established in 1904. Other primitive credit companies established the percentage of receivables which they would finance.. They also innovated the account procedures utilized to track invoices, which had been issued, and monies received which were still in use.

The incredible thing is that even with a history dating back prior to the founding of our country, factoring is one of the best kept secrets in American business today. However, things are changing and factoring is becoming more widely understood and employed. There may well be several hundred funding sources in the U.S. that are currently purchasing receivables, either in the form of invoices or consumer contracts. With the technology available today, we have come a long way from the factoring done by the Phoenicians or Romans; but, the concept has remained similar.



Thanks to Anthony Cicone for contributing this article to our Factoring blog:

Medical Receivables Factoring