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History of Accounts Receivable Factoring

Accounts receivable factoring in the United States has historically been one of the most sought-after methods of financing that immediately improves the cash flow of a business. When a company decides to discount its accounts receivable to a financial institution then it is termed as factoring, not borrowing. The factor then bears the credit risk for the accounts and becomes the recipient of payment from the customers. It is among one of the most effective and efficient forms of financing used these days.

Invoice Factoring has essentially been in existence since the beginning of trade and commerce. It can be traced back to the period of a Mesopotamian king Hammurabi. However, the first widespread, documented use of factoring occurred in the American colonies before the American Revolution. During this time raw materials like cotton, furs, tobacco and timber were shipped from the colonies to Europe. Merchant bankers in London and other parts of Europe advanced funds to the colonists for these raw materials, before they reached the European Continent. This enabled the colonists to continue to harvest their new land, free from the burden of waiting to be paid by their European customers.  The practice was very beneficial to the colonists, as they didn’t have to wait for the money to begin their harvesting again.

U.S. Cotton Factoring
The role of Factors is well illustrated by the “cotton-Factors” in the United States in the early 19th century. Cotton was exported from the South to New York and Europe. Eighty percent of the U.S. cotton crop was sent to Europe. Extended transportation and warehousing periods caused long delays from the harvest until the payment from the spinning mill. Thus, the need for the Factor to advance money against orders became very important to the growers so the growers could continue operations while waiting for the payment the funds to travel back to them.

The transportation and the sales were performed in stages: from plantation or farm to a trading town in the interior or on a navigable river; from there, directly or indirectly, to an export port on the seaboard like New Orleansor Savannah. There is still an historic area in Savannah near the river called Factors Walk. From the export port the cotton was shipped to New Yord for its ultimate destination, Europe.

Transportation of the cotton bales was directed and financed by a network of specialized cotton Factors. The cotton was sold on commission to Factors up the chain. Advances were granted and taken with the money coming from the export Factors. These advances were often financed by Factors that operated in importing countries or in another country rich in capital.

Basic work of factors from colonial times is similar to factors of conventional times. Current day factoring companies perform the same function of making advances against the accounts receivables of its clients. 

During Industrial Revolution the concept of factoring  narrowed down to the value of credit. In the 1960’s and 1970’s, with an escalation of interest rates and tighter credit, there was a surge in the number of private factoring companies. The trend continued in 1980’s with a further increase in interest rates and regulations in the American banking industry.

With various expenses and inflexible rules involved with banking, accounts receivable factoring is a safe and easy method for financial expansion and growth. Working capital arranged through factoring is an easy means to cover purchasing, operating, payroll and other costs and provides the much-needed freedom from functions like credit and collections. All these attributes have made ‘factoring’ a buzzword in the financing market.

Why Factor?
For many of those using receivable factoring today, receivables provide them with an additional asset to leverage for funds. For others, factoring provides a diversification of risk. The variety of receivables held by a Factor provides greater diversification than is possible for a firm in one line of business. Factors also provide a level of expertise in management of accounts receivable. Businesses with seasonal sales can leverage the benefits of a factoring company's accounts receivable management system and do not have the added cost of a credit or collections department within their business.

Factors provide financing alternatives that may not be available from usual sources for small transitional and rapidly expanding businesses. As sales expand, so does the availability funds from the factoring company. Once the business has been able to build an adequate base of capital from retained earnings, it may move to a less expensive, secured line of credit at a commercial bank. The Factor is often a temporary necessity. However, many companies continue to factor their receivables to obtain the credit services provided and to offer credit more freely than if they were to rely on their own expertise and resources. Many business owners also stay in factoring relationships because they prefer the freedom to manage their taxable income in way that may not be permitted by a bank.

Factoring Today
Factoring account receivables continues to alive and well in America. The larger brick and mortar Factors have, just as banks, been consolidating to form even larger factoring companies. Competition for market share is as fierce as ever. The types of businesses using factoring financing  are expanding, becoming more technology based and factoring internationally is growing. Accounts receivable factoring is evolving and continuing to grow. With the speed and agility of Internet technology, it is possible to access online based factoring companies who will take an application, review your invoices and,  upon approval, factor eighty percent (or more) of each invoice back to you in cash—without ever seeing your face.

If you are a small growing business with orders to fill and invoices to leverage, you may be able to obtain operating capital through a Catamount Funding, Inc. using us as a financing alternative. If you are interested in receiving a quote from us please contact us toll free at 877-647-8577 or email us at info@catamountfunding.com . An account executive will be happy to answer any questions you may have. We encourage you to obtain references from any service provider or creditor with whom you are considering entering a business relationship.

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