subject: Varied Uses Of Business Factoring [print this page] 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.
The history of factory started centuries ago. Factoring was a financing trade. It was used in England before 1400. The banks used to extend factoring services to clients. But banks expanded to providing financial services that cater to businesses other than related to trade or business.
As time rolled on, factoring underwent several changes. The changes are brought about by technology, such as telegraph, air travel, telephone then eventually the introduction of computers. The changes in the legal structures of England and United States also influenced the changes in factoring rules.
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.
Factoring in the past used to possess the goods, give cash advances to the seller and then financed credit to the buyer and provide insurance to the credit strength of the buyer. England passed the Act of Parliament in 1696 to reduce the control of the factoring company.
Factoring further underwent changes when larger businesses came to the scene. These businesses are able to establish divisions that took care of different functions. Specialized functions such as sales division and distribution channels were created. Due to this, factoring businesses functions were also specialized. Firms were able to determine the financial strengths of their customers. These elements put a stop to the monopoly exercised by factoring over firms in the past.
During the early twentieth century, factoring became one of the main sources of capital used in the textile industry. The proliferation of factoring was due to the US banking system which created a number of small banks with limited capacity to loan money to companies.
The purpose of factoring today revolves around the idea that factors can give cash advances to smaller firms or a seller who act as supplier of goods and services to bigger client firms or the debtor. They are no longer allowed to have ownership over the goods sold by the seller. But their focus is more on releasing funds or cash advances to sellers. Factors, in the process, accomplish four essential tasks in behalf of the sellers. First, they gather and provide information on the financial capabilities of their clients. Second, they can provide the history of payments of the customers. Third, they update reports on collection everyday. And finally, they collect payments from the debtor.
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.
