Factoring is one of the oldest known forms of commercial finance and though it has grown steadily through the centuries, its basic structure and list of services is still very similar to those found in transactions referenced during the Middle Ages. Over the centuries, factors have created many transactional programs to accommodate particular customer types. Today, factoring programs and specialty areas are expansive and nearly as numerous as the factors themselves. Still, the nuts and bolts basics of accounts receivable factoring remain the same and can actually be divided into just two major styles; Maturity Factoring and Advance Factoring.
Maturity Style Factoring
Maturity Factoring, with its historical roots imbedded firmly in the garment and textile industries, has been common in America since the 1920’s and is known by a variety of other names such as Traditional Factoring or Old Line Factoring. All true maturity factoring arrangements are primarily structured around the factor’s provision of credit and collection services rather than that of actually advancing cash for financing. In a standard maturity style factoring transaction:
- The factor provides credit analysis of a client’s customer or group of customers.
- If not paid timely by the customer, the factor pays the owed amount upon credit approved accounts in an agreed upon number of days after sale, delivery, and invoicing.
If a credit approved customer is unable to pay an invoice due to insolvency or bankruptcy, the factor provides payment as guarantor. There are no “advances” of cash made under a true maturity factoring arrangement. Payment is only made at the average maturity of the invoice batch if the purchased accounts remains unpaid.
As mentioned, maturity factoring is historically related to the garment and textile industries where it is still routinely found. In fact, some aspects of modern maturity factoring in America are easily traced back to the Colonial era of “king cotton”. Because of the massive (and ever growing) amounts of offshore manufacturing now prevalent in this industry, true maturity factoring arrangements are no longer as common as they once were. In fact, recent polls of the industry reveal that well under twenty percent (20%) of all factors now offer a maturity-styled factoring product.
Advance Style Factoring (California-Style Factoring)
Since maturity factors historically purchased and had control over a client’s accounts receivable, a natural and eventual service addition to the maturity style was to provide some form of “pre-payment” or finance option upon the invoices purchased, rather than just traditional credit analysis and collection services. Such requests were already occurring on occasion in the maturity factoring arena and enough in fact, for some creative California-based factors to style a completely new type of factoring based upon an immediate advance of cash rather than just credit and collection services.
California factoring, most often called advance factoring, focused on industries other than garments and textiles and created a powerful new and accessible form of small business finance now available to cash-starved entrepreneurs nationwide. Unlike maturity factoring arrangements where the client expected to wait 30-60 days before payment was received, the new advance factors tended to put their clients on almost a C.O.D. basis. Advance factoring was initially directed towards smaller clients, typically those business owners generating under $150,000 in sales each month, since this was a business segment largely ignored by the nation’s large maturity factors.
Once the advance factoring transaction was perfected, this new factoring style grew exponentially. Today, the advance style of factoring represents a strong majority of all transactions and an ever growing segment of the asset-based finance industry.
The Growth of Advance Factoring
As the prevalence and popularity of the modern advance-style of factoring grew, hundreds of industry types and segments were added to the range of prospective factoring clients. It’s now safe to say that the days of factoring services being primarily associated with the garment and textile industries have likely ended forever.
In a standard advance-styled factoring transaction today:
- The factor advances funds on purchased accounts immediately with cash being wired directly into the client’s business bank account.
- The factor still provides expert credit analysis and collection service for the client’s benefit.
- If a credit approved customer is unable to pay an invoice due to insolvency or bankruptcy, the factor may make payment as the guarantor under non-recourse arrangements or may not under recourse arrangements. In a non-recourse arrangement, the factor’s guaranty of payment only extends to matters of insolvency or bankruptcy of an approved customer and not trade disputes related to poor performance.
Post questions regarding the types and styles of factoring om the group feedback on the IACFB Factoring Campus at LinkedIn.