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Introduction
Many people have called factoring many things over the years, and to be honest some of them not very complementary. In an attempt to remove the stigma that was associated with “factoring” in its early days (mainly in the 70’s and 80’s) the factoring industry world-wide has tried changing its name to Debtor Finance, Invoice Finance, Cash Flow Finance, through to Receivables Finance and Invoice Discounting. Whatever name is used it is essentially the provision of finance against the business to business invoices of a company.
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About the Author: Tim Lea is the co-author of the book "A Guide To Factoring and Invoice Discounting: The New Bankers."
He has spent 20 years within the Cash Flow Finance industry, as both a lender and a broker and is the Managing Partner of Cash Stream Financial, an independent commercial finance broker specilaising in Factoring, Invoice Discounting and Inventory Finance. |
This White paper seeks to bring together 20 years of experience within the industry - so we can only hope to skim the surface of a facility that is gaining increased acceptance worldwide. However we will explore the core elements you need to know
1) The History of factoring
2) How It Works
3) The different Facilities available within the marketplace
4) How it compares to other forms of finance
5) The costs and their justification
6) The typical companies that use the facility
7) Some key things to look out for with the facility
The History Of Factoring
Factoring has been around as long as civilisation has carried out business. There is some evidence dating back to the time of the Mesopotamians, where the essentials of a factoring contract were seen in their Cuneiforms, the stone tablets used for communication at these times – over 3,000 years ago.
Equally, there has been further evidence of factoring in Roman times where promissory notes – i.e. a promise to pay – were being sold at a discount to third parties. Indeed the very name of factoring takes its name from the Latin derivative of fattura (the Italian word for invoice)
Factoring facilities as we know it today were first developed in the early stages of international trade in the 17th and 18th Centuries, where the length of time between producing and shipping raw materials meant a very long delay in payment being received. Early Merchant Bankers in London sought to bridge this gap and also provided local knowledge about the ability of local buyers to pay for the product purchased.
It was the 1920’s that saw factoring truly take off with the massive growth being seen in the US textiles industry. The local banks at the time were very conservative lenders – seeing expansion as a higher risk and as with all vacuums that are created this gap in the market was filled by factoring finance specialists.
Even today the textile industry world-wide is an extensive user of factoring services. Factoring since this time has become an increasingly mainstream facility, with it becoming a multi-billion $ business worldwide. Indeed factoring is increasingly become recognised as the de facto finance facility for expanding companies.
How Does Factoring Work
Factoring is essentially very simple. A company raises its invoices to its customers in the usual way, with Details of those invoices sent to the financier?
After assessing the creditworthiness of customers and the bona fides of the invoices, up to 90% of the invoice value is released - usually the same day. (This is instead of a company waiting for typically around 55 days to get paid.).
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