The Diverse Advantages Of Business Factoring PDF Print E-mail
Written by Jack Bennington   
Thursday, 29 July 2010 10:58
Business factoring is an accounting term that refers to the sale of accounts receivable to a factor so the seller can use the money for the company cash flow. There are three vital parties involve in factoring transaction. First, the seller. Second, the debtor. And lastly, the factor or factoring company.
by JackBennington


Business factoring is an accounting term that refers to the sale of accounts receivable to a factor so the seller can use the money for the company cash flow. There are three vital parties involve in factoring transaction. First, the seller. Second, the debtor. And lastly, the factor or factoring company.

Factoring started as a financing trade. It started in England even before 1400. The banking activities in the past include factoring as part of their services. But banking evolved further by extending financial services to activities that are not related to trade or business.

As time went by, factoring saw some transformations. The changes are due largely to different technologies introduced like telegraph, air travel, telephone then later on, computers. The alterations in the rules passed in England and United States also created modifications in factoring.

In the olden times, English law required that the debtor be informed if the factoring transaction or the agreement will not be enforceable. The transaction maybe rendered invalid if debtor did not know. This law is still observed in Canada. In US, factoring rules were changed in 1949 when some states created a law that required the debtor need not be informed of a factoring arrangement for it to be legal.

The practice of factoring in the old days allow the factor to take possession of the products, provide money to a seller, offer credit to the buyer and determine the buyer capabilities to pay for insurance purposes. England approved the Act of Parliament in 1696 to minimize the power of a factoring company.

As larger companies came in, the factoring transaction was made even more specific. These large companies had the capabilities to make different divisions inside the company such as sales and distribution. They were capable of determining financial strengths of their customers. These factors had a huge impact on factoring and limited their authority even further.

In the early twentieth century, factoring was one of these primary sources of working capital for the textile industry. This situation was encouraged in part by the US banking system and its numerous small banks which limit the amount of money that can be loaned to a firm.

The basic function of modern factoring is to offer cash advances to smaller firms or the seller who transact business with the larger firms or the debtors. They no longer exert huge control over the products sold by the seller like in the past. Their services are now contained in offering cash advances. Factors are assumed to offer four essential services to sellers. First, facts about the credit worthiness of the clients. Second, they have a record on the history of payments of the clients. Third, they produce reports on collection everyday. And finally, contact the debtors for collections.

There are three major distinct advantages that business factoring offers. These are: 1). Outsourcing the credit can shield the smaller firms from financial problems such as the filing of bankruptcy of bigger firms. 2. Smaller firms need not hire accounts receivable staffs. The factoring company effectively monitors and carry out the accounts receivable functions of the seller. 3). It helps the entrepreneurs stay liquid.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

Factoring business is a popular accounting term, defined as the sale of accounts receivable to a factor so the seller can use the cash for the co cash flow. We have got the inside scoop on factoring companies .