Factoring History

Welcome to factoring. 
Whether you own a business, 
look forward to building one or are looking for new
financial tools for your current employer,
Factoring can help you reach your financial goals.

Factoring has the ironic distinction of being the 
financial backbone of many of America's most 
successful businesess. Why ironic? Because 
factoring is not taught in business colleges, seldom mentioned in business plans 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 businesses to grow and prosper.

Factoring is the process of purchasing commercial accounts receivable(invoices) from a business
at a discount. Business practices today dictate 
that in order to get business you, as a provider 
of goods and services, must extend terms to 
your customers.
These terms can squeeze the life(and cash is
the lifeblood of any business) out of a 
new or struggling company.

Factoring has a long and rich tradition, 
dating back 4,000 years to the days of Hammurabi. Hammurabi was the king of Mesopotamia, 
which gets credit as the "cradle of civilization." 
In addition to many other things, the 
Mesopotamians first developed writing, 
put structure into business code and 
government regulation, and came up 
with the concept of factoring.

After a while, Hammurabi and the Mesopotamians
went the way of extinct civilizations, 
but factoring endured. Almost every civilization that valued commerce has practiced some form of factoring, including the Romans who were the first to sell actual promissory note at a discount.

The first widespread, documented use of factoring occurred in the American colonies before the revolution. During this time, cotton, furs and timber were shipped from the colonies. Merchant bankers in London and other parts of Europe advanced funds to the colonists for these raw materials, before they reached the continent. This enabled the colonists to continue to harvest their new land, free from the burden of waiting to be paid by their European customers.

Recognize that these were not banking relationships as they exist today. If the colonists had been forced to use modern banking services in eighteenth century England, the process would have been much slower. The banks would have waited to collect from the European buyers of the raw materials before paying the seller of these goods, the colonists. (And at that point, who needed the bank?) This was not practical for anyone involved. So, just as today, the "factors" of colonial times made advances against the accounts receivable of clients, enabling the clients to continue with their operations, long before they had been paid for what they were sold.

With the advent of the Industrial Revolution, factoring became more focused on the issue of credit, although the basic premise remained the same. By assisting clients in determining the creditworthiness of their customers and setting credit limits, factors could actually guarantee payment for approved customers.

This is known as factoring without recourse(or non-recourse factoring)and is quite common in business today.

Prior to the 1930's, factoring in this country occurred primarily in the textile and garment industries, as the industries were direct descendants of the colonial economy that used factoring so specifically. after the war years, factors saw the potential to bring factoring to other forms of invoice-based business and the expansion began.

Today, factors exist in all shapes and sizes: as divisions of large financial institutions or, inlarger numbers, as individually owned and operated entreprenurial endeavors.

Many of these private factors sprung up in record numbers as interest rates rose to new heights in the 60's and 70's. This trend intensified in the 80's, primarily due to the increasing impact of interest rates and changes in the banking industry. With banks becoming too expensive and too inflexible due to heavy regulation(remember the Savings and Loan crisis?), the small businessperson was forced to find other sources of financing for expansion and growth. As more and more banks stop befriending the small bussinesperson, factoring is becoming an increasingy popular option.

This year alone thousands of businesses will sell billions of dollars in accounts receivable, and they are doing it for profit, growth, and in some cases , their very survival.