Factoring is the sale of your accounts receivable (invoices) to a funding source at a discount off the face value in return for immediate cash. The funding source is known as a factor

The process typically works like this: You deliver a product or service and issue an invoice to your customer. Without factoring, you wait 30,60, or 90 days for payment. With factoring, the factor immediately purchases the invoice and advances an initial payment of 70-95 percent of the invoiced amount. In most cases, you'll have funds in your account within 24 hours. When your customer pays the invoice (payment is made directly to the factor), you'll receive the remaining balance (5 to 30 percent of the invoice amount) less the factor's fee.

Factoring is a well-established form of business financing that produces immediate cash payments to a company at the time of shipment, delivery and invoicing a customer. In its basic form, factoring has been used by American business since Colonial times, and its origins go back even further, literally thousands of years to the early days of commerce.

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Perhaps the most attractive aspect of contemporary factoring is a continuous level of cash flow into a manager's hands, allowing business planning and operation in a timely and efficient manner. The factoring system also means available financing which automatically adjusts to your unique rate of business growth, because increased cash is triggered by new invoices. Factoring is the only finance mechanism directly linked to a company's sales.

Factoring is used more than all other types of business financing combined. Many of America's major companies are enthusiastic users of this finance system and have been for years. But factoring is not an exclusive prerogative of commercial and industrial giants. In fact, factoring comes a lot closer to you personally than just through big-name business whose products you know and use.

American consumers take part in a common form of factoring every time they use a credit card. There are 1.15 billion credit cards in circulation, 10 each for every American cardholder. In 1970 the average balance on individual cards was $649, increasing in 1986 to $1,472, and today it is over $2,800. Millions of times a day every business that offers customers charge privileges using credit cards is the direct beneficiary of factoring. American retail business depends on the factoring system, and without it the national economy would be seriously handicapped.

In this familiar transaction, the issuing bank or card company is the factor-using the Visa, MasterCard or other system-advancing the seller of merchandise or service cash immediately after your purchase, long before you actually pay. Because the seller gets cash up front without having to wait for your payment, his money is not tied up in receivables. For the double privilege of making credit available to customers and getting immediate payment, the business is willing to pay a discount to the issuing bank or credit card company-typically two to four percent of the purchase price. Thus for ever $100 of merchandise you buy with a credit card, the seller gets $96 or $98 in immediate cash.

Factoring accomplishes the same for commercial-or business to business-transactions. When you extend credit to a customer, you are essentially becoming that customer's part-time banker. For the period credit is extended to Customer Smith-30 or 60 days-you become his lender, and he your borrower. For the length of time credit is extended you lose the value of that tied-up money because you can only anticipate payment. If Mr. Smith had paid cash, you could have invested that money immediately, earning interest on it rather than having to wait. When Smith pays late, your cost increases still further.

Since there is no "free lunch" in business, someone has to pay the costs of your extension of credit; either you pay by reduced profits, or your other customers are forced to pay higher prices. In a marginal company, excessive credit extension and late customer receivables can spell disaster.