How Factoring Has Been Used Throughout the Ages
Since ancient times, businesses have been selling their invoices to a third party (factoring company) to fund cash flow. It is not a new way to do business, but the financial transaction has evolved into the modern form familiar today.
The earliest evidence of factoring is from traders in ancient Mesopotamia or modern-day Kuwait, Syria, and Iraq. These traders were using a variation of the financial transaction in their business dealings in 2000 B.C. Part of the Code of Hammurabi deals with the rules for merchants who wanted to use the instrument as a form of funding. Ancient Romans merchants also used it to guarantee trade credits.
Medieval Europe set down rules about factoring as a more modern form developed in response to increased trade and the need for alternate forms of funding. The practice continued to grow and mature into the Renaissance.
The Pilgrims brought the idea to the American Colonies in the 1600s along with commerce and trade, and it was commonly used between Europe and the Colonies. At first, the process included the third party taking physical possession of the goods, sell them, take a percentage of the profits and then send the rest to the seller. This process evolved to the third party insuring and financing the credit, which changed the focus to the creditworthiness of the seller’s customers.
In the late 18th and 19th centuries, the financial transaction became more diversified. Third-party companies began purchasing goods, handling shipments of raw goods to market, and selling crops.
By the 20th century, the growing textile industry used factoring as a major source of funding. The amount banks could lend was restricted by law, but the third parties did not have those restrictions. This made the financial transaction attractive to other industries such as freight forwarding and transportation.
Some U.S. banks began providing third party services in the 1940s. The 70s and 80s saw it become more popular because of rising interest rates and bank regulations.
During the 1990s, financial giants, including GMAC and G.E. Capital, began offering third party services, as did major banks. At the same time, smaller start-up companies began targeting specific industries with third party services.
Access to the Internet and cloud-based platforms, as well as other technological breakthroughs in the 2000s, made the financial transaction quicker and more accessible to companies large and small. The future will likely bring continued evolution and diversification.