Tracing Back Factoring To Its Roots
Definition of Factoring: A financing method in which a business owner sells accounts receivable at a discount to a third-party funding source to raise capital.
Basically, a business sells its invoices to a factoring company who pays the business a discounted amount off of the face value amount of these invoices, and then receives payment for the invoices from the company’s customers directly on the date that the invoices are due, i.e. in 30, 45, 60 or 90 days time.
It will surely surprise you once you discover the history of factoring. In this article we will review the history of factoring as well as the pros and cons of factoring.
Almost since the dawn of civilization, there has been factoring. Factoring is a way of advancing funds for expected payment. In the earliest times of civilization, 4,000 years ago, the Mesopotamians used factoring in their business dealings. However, factoring was not terribly regular. The ancient Romans used a form of factoring by selling promissory notes on a secondary market at a discount.
The trade between the American colonists and European buyers made factoring popular. Before the American Revolution took place, merchants living in different colonies send all types of raw materials to other merchants like the British and the Europeans. However, sending the goods such long distances could get expensive. On the other hand, the travel time for payments from Britain and Europe take time and often causes delays in the harvest of plants and processing of new orders.
As a solution, British and European merchants pay part of the materials to the colonists. This way, the colonists had an advance with which to continue their operations. This method stabilized the cashflow and ensured the continuation of the trade without any difficulties.
The focus of factoring changed when society progressed after American Revolution took place and Industrial Revolution began. An important aspect to factoring is credit. The company;s credit is an as important as its clients’ credit. Indeed, in many cases, factors helped companies figure out which of its customers were the most credit worthy. This way, factors could also help companies keep their cash flow moving. They advanced companies capital based on what was owed them by their credit worthy customers.
Before the 1930s, the most popular industries for factoring were the garment and textile industries. These are industries that rely on raw materials. Factoring was used in order to make sure that these companies can continue buying raw materials in order to keep producing clothing and textiles. Nevertheless, it became obvious after WWII that factoring can be applied for any kind of business that makes use of invoices.
During the 1960s, 1970s and 1980s, interest rates were on the rise and banks were increasingly regulated. This situation made it harder for most companies to acquire traditional financing. This made factoring a whole lot more famous because credit checks are carried out in a different manner. Additionally, since the invoices were bought – minus a fee – it was possible to avoid the same sort of interest charges. Small business, start-ups and rapidly growing businesses benefitted especially from this increase in factoring. Factoring grew as a service as businesspeople found their options contracting.
Today, factoring remains a viable alternative to more traditional financing. Thousands of businesses sell their accounts receivable to factors every year – amounting to an industry representing billions of dollars. And nearly any business with reliable customers and an invoicing system can take advantage of factoring.
Advantages of Factoring:
The main advantage of invoice factoring is that it provides you with upfront cash rather quickly. You do not have to wait days, weeks or even months to get approved as you do for a traditional business loan. In most instances, a few days is needed in order to set up a factoring arrangement and the moment the set up is complete the money can be in your hands the next day.
Moreover, in factoring there is no need to re-apply on a regular basis just in case you need more money. Once an arrangement has been reached, you can sell your invoices to the factor again and again without the inconvenience of being approved each time. And you get you money more quickly.
Factoring can be a great way to improve your company’s cash flow and ensure that you have the funds you need to keep operating your company.
As with all things, development of this industry has happened and today, different types of Factoring products exist, such as spot factoring, a newer type of invoice factoring, which you can use as part of your business growth strategy.
Spot factoring companies base their decision on the value and quality of your Invoices. There are no minimums, no maximums, no long-term commitments and no lengthy application processes when using a selective invoice factoring company.

