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In a factoring transaction, a business sells one or more invoices to a factor. A factor is simply a funding source that specializes in funding accounts receivable.

Please visit the following sections to find out more about the history, process and benefits of factoring.

• The History of Factoring

• The Factoring Process

• Benefits of Factoring
• Factoring vs. Bank Financing

Factoring is one of the world's oldest methods of finance. According to historians, factoring dates back to ancient Roman civilization, when merchants used factoring to settle their trade debts.

Factoring got its start in the America when early factors helped finance the pilgrim's journey to the New World. Colonists later used factoring to sell raw materials such as tobacco and cotton. They shipped these materials to a factor in England, who charged a fee for selling them. Factors then performed the same function for goods being shipped back to the colonies. These factors also advanced funds based on the companies' accounts receivable just as they do today.

During the Industrial Revolution, factors began to fill more of a banking role than they had previously. Factors would assist clients in researching potential customers and then purchase their accounts receivable once they began to do business.

In the early 1900s the first independent factoring companies were started. These early factoring companies established a percentage of the accounts receivable that they would advance for their clients. Typically, they would advance 70-80 percent of their clients' invoices. They also established accounting systems by which they could keep track of monies advanced. The percentage-based system and account tracking systems are still used in the industry today.

As factoring became more established, it became a major source of financing in the garment, transportation, and furniture industries. These industries, as well as Fortune 500 companies, were the mainstay of the factoring industry until approximately 40 years ago. In the 1950s, small to mid-sized businesses began to use factoring to solve their cash flow needs.

Until the 1960s, most factors were small, entrepreneurial companies with limited assets. As competition arose in the financial arena, factors began to merge and consolidate into larger and larger companies. This merge-and-consolidate trend resulted in two distinct levels of factoring companies: 1) Large, institutionally-owned factoring companies and 2) Smaller, independent factoring companies. Because these distinct groups cater to different type of clients, factoring is open to businesses of many types and sizes, regardless of how large or small the business' needs are.

Today, there are approximately 400 factoring companies in the United States. The top 12 largest factors handle about 75 to 80 percent of worldwide factoring volume. The remaining 20 to 25 percent of the volume is done by small, independently-owned factors. Murcor Funding will team with both large and small factors in order to get your company the capital it needs.

When a business factors an invoice, the process occurs as follows:

• The factor advances a certain percentage of the invoice amount to the business.
• The factors also holds a percentage of the invoice amount on paper as a "reserve."
• The factor assumes the right to receive payments on the invoice.
• The business's customer submits payment to the factor.
• The factor rebates the reserve amount less the factor's fee.

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