invoice factoring

As a factoring company Fostrian's mission is 100% centered on fostering our clients' growth and overall emergence to success. We want our clients to strengthen their financial position and graduate to bank financing.


Factoring Defined

Factoring is a financing vehicle used mostly by emerging companies that are unable to arrange traditional bank financing. Specifically, factoring is the purchase of accounts receivable at a discount for immediate cash.

How Factoring Works

Upon creation of an invoice you submit the invoice to Fostrian Business Capital. Fostrian purchases the invoice and immediately advances you up to 90% of the invoice amount. While the invoice is open, statements will be mailed to your customers on a regular basis. If the past due status of the invoice warrants, collection calls will be made. Fostrian's account managers will deal with your customers politely, with respect and with the highest degree of professionalism. Upon payment of the invoice to Fostrian, you will be paid the balance (10% less our fee in this example). Factoring allows your business to quickly get the capital it needs.

Benefits Of Factoring

Regardless of the strength of your financial statements, you are eligible for a working capital credit line through the factoring of your accounts receivable. In conjunction with this credit line you will receive a comprehensive accounts receivable management service. This website's page entitled "Why Fostrian" provides more details on these services.

Brief History of Factoring

The origins of factoring go back to the Roman Empire, or some say even as far back as Mesopotamia.

In America, factoring got its start in the early 1600s. Around that time, there was an interdependency between American colonists and British industry. The colonists provided raw materials (timber, tobacco, etc) to British industry, which in turn shipped finished product back to the colonies. In order for the colonists to keep pace with the shipments required by British industry, they needed capital, and could not wait to be paid until their raw materials made it all the way across the Atlantic. European banks stepped in to fill this need. They advanced funds to the colonists upon shipment of the raw materials, and later collected from the British customers. These banks thus became, in effect, the first "factors" in America.

Jumping to the 1800s, we see an evolution to American "selling agents" working on behalf of European textile mills. These European mills sold to American customers but lacked familiarity with the American market's "terrain". This knowledge gap was filled by American selling agents who provided a comprehensive set of services that facilitated moving product from the European mills to the American customer. These services included sales, warehousing, shipping, customer credit evaluation, collections and cash advances to the European mills. American factoring firms evolved from these selling agents. The year 1810 saw the birth of the first documented American factoring firm.

Until recent times, factoring was predominately concentrated in the textile industry.  This has changed as factors have diversified into virtually all business-to-business industries. A recent development is niche factoring, where factors specialize in certain industries, deal size etc. You now see factors specializing in trucking, construction, staffing, medical, international sales and government sales.  Others specialize in deal size; some go after only the smallest-of-the-small clients, others only the largest clients.

Factoring industry growth has been impressive over the last 30 years.  In 2005, U.S. factoring volume was $112.8B, up from $20.2B in 1976.  There must be something to this factoring thing!

Glossary of Terms

Account Debtor - factoring client's customer that owes money on an invoice sold by the client to the factor.

Accounts Receivable Factoring - (See "Factoring")

Accounts Receivable Financing - form of financing which uses accounts receivable as collateral for a loan.

Advance Rate - the percentage of the value of an item of collateral that represents the amount a lender will advance to a borrowing client. As applies to factoring, it is the percentage of a client's accounts receivable that a factor will advance to the client.

Asset Based Lending - a form of financing where the lender uses collateral, such as inventory, equipment or accounts receivable, as its primary security source for the loan. Factoring is considered a form of asset based lending.

Assignment Letter - letter sent to a factoring client's customer, notifying the customer that payments on the factoring client's invoices are legally due and payable to the factor.

Borrowing Base Certificate - in asset based lending, a certificate that contains a formula the lender and borrower have agreed to that determines how much can be borrowed on an asset based credit line. This certificate is completed by the borrower and submitted to the lender generally at least once a month.

Capital Structure - a company's financial framework. More specifically the amounts and types of long-term financing utilized by a firm including common stock, preferred stock, long-term debt and retained earnings.

Cash Collateral - negotiable instruments, documents of title, securities, bank deposits, and other short term assets that are readily convertible into cash.

Concentration - the amount, or percentage, of an asset based lending/factoring client's accounts receivable due from a single customer.

Dilution - the amount, or percentage, of accounts receivable not collected because of discounts taken, credits taken, trade allowances granted or financial weakness of the debtor.

Direct Notification Factoring - type of factoring where the factoring client's customers are notified that future payments on the factoring client's invoices are to be remitted to the factor.

Discount Fee - the amount earned by a factor on each invoice purchased, expressed as a percentage of the invoice amount.

Factor - a company in the business of purchasing accounts receivable. As a verb: the act of purchasing, or selling, accounts receivable.

Factoring - the selling, or purchasing, of accounts receivable at a discount for immediate cash. Also see: The Factoring Industry’s Many Names

Factoring Reserve - the face value of an invoice or certain accounts receivable in aggregate, less the factor's advances, fees, discounts or credit memos taken, disputed invoice amounts and other ineligible invoice amounts. The factoring reserve represents a liability of the factor to the factor's client.

Financial Statement Lending - loans made based on the strength of the borrower's financial statements. This type of lending is generally practiced by banks.

Floorplan Financing - the financing of distributor or dealer inventory. In a typical floorplanning arrangement, a distributor or dealer finances shipments of merchandise from its supplier by borrowing funds from a commercial lender. Repayment terms are linked to the ultimate sale of the merchandise or according to a schedule.

Forced Liquidation Value - the estimated gross dollar amount that could be typically realized in a sale via a properly conducted public auction.

Invoice Factoring - (See "Factoring")

Lien - a creditor's claim against property.

Notification - process whereby the factoring client's customers are notified that future payments on the factoring client's invoices are to be remitted to the factor.

Orderly Liquidation Value - the estimated dollar amount that could be typically realized from a liquidation sale, given a reasonable period of time is allowed for to find a buyer.

Over-advance - the dollar amount by which the amount owed by a borrower exceeds the amount available under the borrower's line of credit.

Perfection - method by which a secured creditor puts the world on notice of its claim against its collateral, and establishes the priority of its claim as against other secured creditors or any other parties claiming an interest in the collateral.

Recourse Factoring - type of factoring where the factoring client is liable to the factor for advances made on invoices never paid by the factoring client's customers.

Salvage Value - an estimated dollar value of a fixed asset at the time it is retired from service.

Securitization - the bundling of a pool of non-traded financial contracts against which traded securities (asset backed securities) are issued. The types of non-traded financial contracts include residential mortgages, commercial mortgages, credit card receivables, auto loans and student loans.

Spot Factoring (single invoice factoring) - factoring product where the factoring client chooses the invoices to be factored, as opposed to most factoring programs that require a minimum "basket" of accounts receivable to be factored. Spot factoring is generally a more expensive method of factoring because of its relative riskiness to the factoring company.

Subordination - moving to a lower priority. Generally subordination as used in finance refers to one creditor "subordinating" its interest in a piece of collateral to another creditor.

Uniform Commercial Code (UCC) - a set of statutes governing commercial transactions and virtually adopted in full by each state in the U.S. The purpose of the UCC is to create uniformity of commercial law from state to state.


© 2006 Fostrian Business Capital Corporation