Factoring – A Brief History
The history of factoring is not as simple as that of loans and other formal financial agreements because throughout history it has not attracted nearly as much attention. So why, if Factoring is so deeply rooted in history, is it still labelled an “alternative” means of funding? In this article we attempt to chart the history of factoring and in turn answer this question.
An Ancient Text Reveals All
The first indication of factoring, as we know it today dates back to the Mesopotamian era. The Code of Hammurabi (1772 B.C.) is an ancient document that contains laws depicting the practice of credit that form the foundations of modern Invoice Finance.
According to history Jewish businessmen also used Factoring in the 1400s as security for their crop. The businessmen would lend money to exporters, using invoices issued for the sale as their security.
In fact some credit the colonisation of America in the 17th century to factoring because colonialists are said to have been funded by merchant bankers using Invoice Finance thus allowing them to sail and settle in America in 1620.
In the resulting centuries Factoring still appears to be viewed as an alternative method of funding. The language of the law was of the reasons Factoring remained an unusual method of funding as any factoring facility was declared invalid if the debtor was not notified of the agreement in England, America and Canada.
However, Factoring withstood the test of time and continued to be used as a form of funding. It was for example used in industries where value was added to raw materials like the textile industry in early twentieth century USA.
Factoring In The Modern World
Factoring, as we know it started to gain popularity in the UK in the 1960s. However its reputation tended to precede it as a last resort option for funding.
This started to change in the 70’s and 80’s when banks started to offer factoring services, making it seem more legitimate to the public.
Efforts have been made to educate the public about how useful factoring can be and the Asset Based Finance Association (ABFA) was established to represent the asset-based lending industry.
Today, businesses use Factoring to bridge the gap between sending out invoices and getting paid. The importance of cash flow has not changed over the many centuries that factoring has been around, demonstrating that factoring should be treated with the same respect as any other formal financial agreement.
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