What is Factoring of Receivables?

Factoring of Receivables
Factoring as a part of business was done in England even before 1400, and it started in America with the Pilgrims too, in the early 1600s. It seems to be nearly related to the early merchants of this country. Factoring has changed over several centures.

Receivables financing is sometimes called factor, and it’s a method that businesses use to convert their sales that were done on credit to an immediate cash flow. This is the preferred financial tool in getting liquid working capital for businesses of all types and sizes. The credit line that can be received is based on the customer’s financial strength, that is the buyer, and not the client, that is the receivables seller.

Factoring is a kind of financial transaction, and a business will actually sell its invoices to another party, and this party is referred to as a factor, for a discount.

The three separate parties involved are the party who sells the receivable, the customer, and the factor. The receivable is basically a kind of financial asset that’s connected with the liability of the debtor to pay the money back to the seller, and it’s often for work that’s done or goods that are sold. The seller will then sell at least one of his invoices, that is, the receivables, at a discount to another party, which is called the factor, and the purpose is generally to get cash.

The receivables sale basically transfers the ownership of the invoices to the factor, and that means that the factor has all the rights that are connected with the receivables. Basically, the factor will get the right to get the payments made by the debtors for the invoice amounts and, in a certain kind of factoring known as nonrecourse factoring, he will also have to bear the loss if the debit never pays the invoice because of a financial instability to pay it. The account debtor might be notified of the invoice’s sale, and the factor will bill the debtor and carry out the collections. There is also non-notification factor, where the seller will collect the accounts that are sold to the third party factor, as the factor’s agent, and that also happens.

The origins of factoring lie in trade financing, especially international trade. Factoring might have originated with ancient culture in Mesopotamia, and it is by no means something new. There were rules of this process that were written into Hammurabi’s Code.

Factoring as a part of business was done in England even before 1400, and it started in America with the Pilgrims too, in the early 1600s. It seems to be nearly related to the early merchants of this country. Factoring has changed over several centures. There have been changes in how companies are organized, technology, the advent of the telephone, and the advent of the computer.

Factoring is generally a method to obtain cash. Sometimes, the cash balance of a company will be insufficient to meet the current needs and obligations that they have, like contracts or new orders. Sometimes, there are industries where factoring has been a historic part of how they run their business, like in apparel or textiles. The firm can keep a smaller cash balance that’s ongoing with factoring. By cutting down on the cash balance size, a lot more money is available as an investment for the growth of the firm.

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Chris Lanchech

Hi everyone, my name is Chris and I am a junior analyst at Neebo Capital and an inspiring blogger. We enjoy speaking with business owners and entrepreneurs who come to Neebo Capital looking for cash flow solutions. Give us a call toll free at 1-888-382-3766 or Visit us online at www.neebocapital.com

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