Invoice factoring refers to the practice of funding the cash flow of a business by selling their invoices at a slight discount to a third party, known as the ‘factor’ or the ‘factoring company’.
Factoring allows a business quick access to a continuous, steady level of cash flow, enabling them to accept new projects, meet payroll obligations, buy new equipment and fund the growth of their business in multiple ways.
The history of primitive factoring dates back several thousand years. Today invoice factoring is at the top of the list of alternative financing options, helping businesses expand across a diversity of industries.
One reason for the continued increase in the popularity of factoring in modern times is because the number of bank loans available for small businesses has significantly decreased. Banks have tightened their lending requirements significantly since 2008 and costs of loans remain high.
Invoice Factoring Fun Fact #1: The pilgrims used factoring to finance the Mayflower and the trip across the ocean to Plymouth Rock. Factoring also played a big role in the rapid growth and expansion of the Hudson Bay Trading Company and the East India Company during the colonization of the New World.
Invoice Factoring Fun Fact #2: The Romans are recognized as the first to sell promissory notes at a discounted price and to hire collectors for the purpose of settling trade debts.
Growth of Invoice Factoring
Invoice factoring continued to grow and expand through 1300s and 1400s. In Europe during this time, banks gave farmers high-risk loans against their crops. That soon developed into money advancements against the shipping and payment of grain delivered abroad. In England, clothing merchants also began using factoring.
Invoice Factoring Fun Fact #3: The word ‘factor’ dates back to the early 15th century. It comes from the Middle French term ‘facteur’ which means agent or representative, Old French ‘faitor’ and Latin ‘factor’ which means doer. You can consider a factor as someone who represents you, typically for a commission, to get things done.
In the early 1900s, American textile companies and garment manufacturers started using factoring so they could continue to purchase the raw materials they needed. By the end of World War II, factoring expanded to other types of U.S. businesses and industries.
Invoice Factoring Fun Fact #4: The area of the world we now know as Syria, Kuwait and Iraq used to be known as Mesopotamia. The Mesopotamian culture developed the Code of King Hammurabi, the Babylonian code of law for ancient Mesopotamia. Factoring rules were laid out in that ancient law code that dates back to about 1754 B.C. The Mesopotamian civilization eventually became extinct, but the practice of factoring managed to survive.
Modern Day Invoice Factoring
In today’s 21st century, factoring companies now exist that cater to the needs of specific industries. Businesses no longer have to wait weeks to hear back from traditional banks, and are able to quickly secure the funds they need, often in 24 hours or less.
Invoice Factoring Fun Fact #5: Most people regularly participate in a form of factoring on a personal level. Using a credit card when you shop is actually a factoring transaction. The bank or the credit card company is the factor, and they take a small percentage of the amount of the purchase and give the merchant immediate access to the rest of the cash even before you actually pay for your purchase.
Today, invoice factoring has reached a pinnacle, and the use of factoring now exceeds all other business financing options combined. It’s no longer only used by small businesses. Many major corporations have been enthusiastic proponents of factoring for their companies for years.
Invoice factoring is available for businesses of all sizes, from start-ups and small businesses to mid-size or large corporations. The business is given the cash it’s already earned, which allows the business owner the flexibility needed for day-to-day operations with no cash flow issues.
Factoring remains the best way to access immediate cash to grow or expand your business without taking on additional debt for your company. CapitalPlus Construction Services is dedicated to specifically providing factoring services to construction companies, helping them meet their financial obligations and achieve their business goals.Back to blog