History of Invoice Factoring & its Growth

HISTQRY OF INVOICE FACTORING ATS GROWTH AND in the 21st Century What is invoice factoring? A financing method in which a business owner sells accounts receivable at a discount to a third-party funding source to raise capital . One of the oldest forms of business financing, factoring is the cash-management tool of choice for many companies. Factoring is very common in certain industries, such as the clothing industry, where long receivables are part of the business cycle. $ In a typical factoring arrangement, the client (you) makes a sale, delivers the product or service and SALE generates an invoice. The factor (the funding source) buys the right to collect on that invoice by agreeing to pay you the invoice's face value less a discount--typically 2 to 6 percent. The factor pays 80 percent to 85 percent of the face value immediately and forwards the remainder (less the discount) when your customer pays. History of Invoice Factoring 1 Almost since the dawn of civilization, there has been factoring. Invoice factoring is a way of advancing funds for expected payment. In the earliest times of civilization, 4,000 years ago, the Mesopotamians used factoring in their business dealings. However, factoring was not terribly regular. 3 The ancient Romans used a form of invoice factoring by selling promissory notes on a secondary market at a discount. Invoice factoring gained true popularity, however, in trade between the American colonists and their European buyers. Prior to the American Revolution, merchants in the colonies sent raw materials, from timber to wool to cotton to furs, to British and European merchants which could get expensive and cause delays in being able to do what was necessary to harvest and plant and process new orders, they paid the colonists in part 4 for the materials. The colonists had an advance with which to continue their operations. This eased cash flow and created a streamlined process for ensuring that trade continued unabated. As society progressed after the American Revolution, and as the Industrial Revolution came, the focus of factoring changed. Credit became more important to factoring. The credit of the company itself was not as important as the credit of its clients. Indeed, in many cases, factors helped companies figure out which of its customers were the most credit worthy. This way, factors could also help companies keep their cash flow moving. They advanced companies capital based on what was owed them by their credit worthy customers. Before the 1930s, the most popular industries for invoice factoring were the garment and textile industries. These are industries that rely on raw materials. In order to make sure that companies could continue to buy raw materials to produce clothing and textiles, factoring was used. However, it soon became evident, after World War II, that invoice factoring could work effectively for any business that invoiced others. During the 1960s, 1970s and 1980s, interest rates were on the rise and banks were increasingly regulated. This made it difficult for companies to get traditional financing. Invoice factoring became even more popular, 7 since it did not require the same sort of credit checks. Additionally, since the invoices were bought – minus a fee – it was possible to avoid the same sort of interest charges. Small business, startups and rapidly growing businesses benefitted especially from this increase in factoring. Invoice factoring grew as a service as business people found their options contracting. Today, invoice factoring remains a viable alternative to more traditional financing. Thousands of businesses sell their accounts receivable to factors every year – amounting to 8 an industry representing billions of dollars. And nearly any business with reliable customers and an invoicing system can take advantage of invoice factoring. Factoring in Five Simple Steps You perform a service for your You send your invoice to a factoring You receive a cash advance on your invoice from the factoring company. customer. company. %24 The factoring company collects full payment The factoring company pays you the rest of your invoice from your customer. amount, minus a fee. 10 Benefits of Invoice Factoring Cash Flow Fast Access to Cash x Without Debt Reasonable Flexible Terms Factoring Fees Stay In Control Relieve Stress Strong Financials Not Required Increase The Bottom Line Confidently Extend Professional Receivable Terms to Customers Management 21st century and Growth of US Invoice Factoring Industry Business Lending June 1998 - September 2011: rebound leaves small business behind By June, 2012, small-business loans decreased $56 billions from the June 2008 peak of $ 336,4 billion. Small business with 40% annual growth were still declined by traditional lenders in the current economic climate. Demand for invoive 40% factoring continues to grow. 15% Since 2004, factoring in US has grown by about 15 %. Factoring volume reached $88.3 billion in 2011, a 10.3% increase. 10.3% Comparison of US with World Markets: 51% The US accounted for 51% of the total factoring transaction in 2010. The factoring volume in US for 2010 wa Total factoring volume in the world for 2010 wa 126.227 2.190,002 (in millions of USD). (in millions of USD). Why Invoice Factoring Stands the Test of Time (4000 years and Counting) Here are 10 reasons why Invoice Factoring is the most reliable form of business financing. 1 Accounting Principle Balance Sheet Invoice factoring standards allow for more cash flow flexibility in accounting. Invoice factoring is viable option for making sure that balance sheets are on target. 3 Liquidity 4 Sustainability -> Like debt trading, invoice discounting factoring produces immediate liquidity for companies seeking alternatives to traditional bank lending. It can be especially pressing to manage accounts during delay of an entire billing cycle. 5 Billing Obligation 6. Uninterrupted Service Advance of funds by an invoice factoring company One reason why this is a great option for businesses is that you get means that accounts the monetary benefit of selling your invoices – immediate working receivables are collateral 24 %$4 for lending agreements sustained by the promise to pay at time of collection on those capital – but your billing - process does not have to be interrupted. outstanding invoices. I Rate Variability 8 Discretionary Service Accrued expenses over time can often exceed the cost of service rates. Some traders charge more than others, S) and in most cases invoice discount factoring services are far higher than standard lending contracts. Invoice factoring companies give you access to private service. 9 Industry Specialization LO Risk Reduction Many invoice factoring companies focus on target sectors. By narrowing your search to a specialist, the best possible returns are likely. Sources: http://www.ucfunding.com/ http://www.entrepreneur.com/encyclopedia/factoring http://www.rtsfinancial.com/guides/what-factoring http://www.bestinvoicefactoring.com/article/history-of-factoring.html https://www.cfa.com/eweb/upload/CFA_Member_ABLFactoring_2011_Reports.pdf http://graphs.net/wp-content/uploads/2012/08/CBAC-invoice-factoring-history-optimized.jpg http://tweakyourbiz.com/finance/2013/01/21/top-10-reasons-why-invoice-factoring-is-the-most -reliable-form-of-business-financing/ UNITED CAPITAL www.ucfunding.com INTELLIGENT.WORKING.CAPITAL.TM 2] 2N