What will you get? Hold on tight!
How does factoring work?
What is factoring?
Get ready for the longread!
Factoring is the financing of firms that provide buyers with deferred payments for the assignment of monetary claims to the debtor (buyer). In other words, factoring is the exchange of future earnings for money today. You have sold the goods with the condition of deferred or installment payment and issued an invoice to the customer. This invoice is a promise of your future earnings, but you have not yet received money from the buyer. VIMcredit takes this invoice and pays you before your buyer does.
Factoring is an alternative form of financing ideal for small and medium businesses, especially those that do not have a long and established banking history with a major credit provider. There is a popular saying in financial circles: "The bank only gives you money when you don't need it." This is because banks operate on a linear funding model based on what your business has already done and the assets you currently own.
Factoring is commonly referred to as receivables factoring, invoice factoring, and sometimes receivables financing. Receivables financing is a term more accurately used to describe a form of asset-based lending against receivables. Factoring is used by B2B companies to provide them with the immediate cash flow they need to meet their current and immediate obligations. Invoice factoring is not suitable for retail or B2C companies.
Are you still here? Have you read all this?
A little more history then, make yourself comfortable.
Factoring as a business life reality existed in England before 1400, and it came to America with the Pilgrims around 1620. It appears to be closely associated with early commercial banking. The latter, however, has evolved through the expansion of non-trade financing such as sovereign debt. Like all financial instruments, factoring has evolved over the centuries. This was caused by changes in the companies organization; technologies, particularly air transportation and non-face-to-face communication technologies, starting with the telegraph, then the telephone, and then computers. They have also been presented and conditioned by modifications to the common law system in England and the United States.
Governments moved too late to facilitate factor-financed trade. English common law originally held that if the debtor was not notified, the assignment between the invoice seller and the factor was null and void. The legislation of the federal government of Canada governing the distribution of funds due to it continues to reflect this position, as does the provincial government's modeled legislation. In the United States, by 1949, most state governments had adopted a rule that the debtor did not need to be notified, which opened up the possibility of entering into factoring agreements without notice.
By the twentieth century in the United States, factoring was still the predominant form of working capital financing for an industry that was growing rapidly at the time. This was partly due to the structure of the US banking system, with its many small banks and the resulting limits on the amount any one of them could lend to a firm.
In the 21st century, the main argument in favor of factoring remains that the product is well suited to the needs of innovative, fast-growing firms that are critical to economic growth.
Modern forms
In the second half of the twentieth century, the introduction of computers eased the accounting burden of factors, and later small firms. The same thing happened with their ability to obtain information about the credit capacity of the debtor. The introduction of the Internet has accelerated the process while reducing costs. Today, credit information and insurance coverage are instantly available in the Internet. The network also allowed factors and their customers to collaborate in real time.
Traditionally, factoring has been a relationship based business and factoring transactions have been largely manual and often included a personal component as part of a relationship building process or due diligence stage. This is especially true for small business factoring, where factoring companies tend to be locally or regionally concentrated. Geographic focus helps them better mitigate risks that they could not afford because of their smaller scale.
More recently, several online factoring companies have emerged using aggregation, analytics, and automation to deliver the benefits of factoring with the convenience and simplicity provided by the Internet. And we, VIMcredit, are among these companies. VIMcredit uses technology to automate factoring and delivers services through a modern web interface for added convenience. This allows us to serve a wider range of small businesses with significantly lower revenue requirements without the need for monthly minimums and long-term contracts.
