History of Factoring
The cash flow industry has evolved, rather than emerged, through the natural business cycles of change and evolution. The industry has its roots in two seemingly unrelated methods of finance – owner financing and factoring. Owner Financing The first method of financing that led to the emergence of the cash flow industry was owner financing. In an owner-financed sale, a real estate seller accepts a promissory note as a portion of the purchase price. The note is then secured by placing a mortgage on the real estate being sold. Factoring The second method of finance that impacted the development of the cash flow industry is factoring, also called accounts receivable purchasing. Factoring dates back thousands of years, but it has evolved into a very modern financing technique. When a business sells a product or service to another business, it sends the second business an invoice in order to collect the money due. The first business can either wait for the invoice to be paid (eventually) or it can sell the invoice to a third party for a reduced amount. The latter transaction is called factoring. Businesses can use factoring to stimulate cash flow.