Factoring has the paradoxical distinction of being the financial backbone of many of America's most successful businesses. Why is it a paradox? Because factoring is not taught in any business college, is seldom mentioned in any business plan and is relatively unknown to the majority of American business people, yet it is a financial process that frees up billions of dollars every year, enabling thousands of business to grow and prosper.

What is factoring? Factoring is the process of purchasing commercial invoices from a business at a discount. Factoring is essentially a credit service designed to improve cash flow - the factor assumes the credit risk of loss resulting solely from the failure of debtors to settle approved invoices because of financial difficulties.

There is a subtle, yet distinct, difference between factoring and what is thought of as financing. Factoring is not a loan. It is the purchase of a debt instrument (commercial paper) at a discount. Today, factors exist in all shapes and sizes as divisions of large financial institutions or, in larger numbers as individually owned and operated entrepreneurial endeavors. With banks becoming too expensive and inflexible due to heavy regulations, the small businessperson was forced to find other sources of financing for expansion and growth, causing factoring to become an increasingly popular option.

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