The development of different businesses gave rise to different business funding means. The most popular are bank loans. However, not all types of businesses are qualified to acquire bank loans. Banks are strict and selective in choosing the ones who will qualify for the loan.
Thankfully, banks are not the only establishments where you can ask for a loan. A better option for many businesses looking to grow leveraging their invoices is to use factoring companies.
What Is Invoice Factoring?
Invoice finance factoring is also known as factoring. It is a type of business financing in which the business owner uses his customer invoices as the collateral. The borrower usually sells these invoices to the factoring company at a discounted price.
It works when the business owner, who is the borrower, enters into a contract with the factoring company. The factoring company will handle the management of the credit control and the sales ledger for a period, which commonly lasts for a year depending on the contract.
The factoring company will give the borrower advanced fund upfront once the borrower sends an invoice to a customer. In return, when the customer pays the invoice, the factoring company will collect the borrower’s debt from this payment. The remaining balance, minus the factoring fees, will be sent to the borrower.
This type of business financing is popular among small- and medium-scale businesses that use customer invoice for collecting payment. The standards in invoice factoring loans are less strict compared to the banks’ standards.
History of Invoice Factoring
The idea of factoring had started in the eighteenth century, during the time of Hammurabi. The Code of Hammurabi stated the rules about the invoice factoring system that the ancient merchants should follow. However, the rules within the code were much different than the modern factoring system.
The modern factoring system, as we know it today, began in the middle ages. The Jewish people who escaped the Spanish prosecution in the 1300s to 1400s lent money to different farmers and merchants by making the profit or the harvest as collateral.
In the 1600s, the European merchants had already been using the factoring system since the American colonization. The merchant agents of that period would usually fund and factor the shipments of goods between the American colonies and Europe. After selling the goods, the merchant agents would take a percentage from the profit.
In the modern era, during the 1910s to 1920s, the invoice factoring system was popular among textile and garment industries. This financing system ensured that the textile companies would have enough funds to buy raw materials that they need for manufacturing the product.
In the 1940s, the USA started to adapt the non-notification factoring system. It was during this period when the factoring system was at its height because of the textile and transportation industries.
From the 1960s to 1980s, the factoring system became popular than banks because of its less strict policies.
If you’re going to look at the history, the terms of the factoring system have evolved a lot from the Hammurabi code to how it is now. No matter what the terms are, invoice factoring has helped several merchants to stay and grow in business.