Factoring is a well established form of business financing that produces immediate cash payments to a company at the time of shipment, delivery and invoicing a customer. In its basic form, factoring, also know as invoice factoring and account receivable factoring, has been used by American business since Colonial time, and its origins go back even further, literally thousands of years to the early days of commerce.

Perhaps the cost attractive aspect of contemporary factoring is a continuous level of cash flow into a business owners or manager's hands, allowing business planning and operation in a timely and efficient manner. The invoice factoring system also means available financing which automatically adjusts to your unique rate of business growth, because increased cash is triggered by new invoices. Factoring is the only finance mechanism directly linked to a company's sales.

Factoring is used more than all other types of business financing combined. Many of America's major companies are enthusiastic users of this finance system and have been for years. But accounts receivable factoring is not an exclusive of commercial and industrial giants. In fact, factoring comes a lot closer to you personally than just through big name business whose products you know and use.

American consumers take part in a common form of factoring every time they use a credit card. There are in excess of $1.15 billion credit cards in circulation, 10+ each for every American cardholder. In 1970 the average balance on individual cards was $649, increasing in 1986 to $1,472, and today it is over $2,800. Millions of times a day, every business that offers customers charge privileges using credit cards is the direct beneficiary of factoring. American retail business depends on the factoring system, and without it the national economy would be seriously handicapped.

In this familiar transaction, the issuing bank or card company is the factor using the Visa, MasterCard or other system of advancing the seller of merchandise or service cash immediately after your purchase, long before you actually pay. Because the seller gets cash up front without having to wait for your payment, his money is not tied up in receivables.  For the double privilege of making credit available to customers and getting immediate payment, the business is willing to pay a discount to the issuing bank or credit card company, typically 2-4% of the purchase price. Thus for every $100 of merchandise you buy with a credit card, the seller gets $96-$98 in immediate cash.

Invoice factoring accomplishes the same for commercial or business to business or business to government transactions. When you extend credit to a customer, you are essentially becoming that customer's part-time banker.  For the period credit is extended to Customer Smith 30, 60 or 90 days, you become his lender, and he your borrower.  For the length of time credit is extended you lose the value of that tied-up money because you can only anticipate payment.  If Mr. Smith had paid cash, you could have invested that money immediately, earning interest on it rather than having to wait. When Smith pays late, your cost increases still further.

Since there is no "free lunch" in business, someone has to pay the costs of your extension of credit; either you pay by reduced profits, or your other customers are forced to pay higher prices. In a marginal company, excessive credit extension and late customer accounts receivable can spell disaster.

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