Factoring… A look back

Ever wonder how or why factoring or accounts receivable financing came to be?  Oddly enough it goes much farther back than you might think.

Factoring dates back to the financing of trade, particularly international  trade.  It is said factoring originated in the far- east  and China,  particularly in the spice trade.  The ancient Romans also used factoring, selling promissory notes at a discount.  Though factoring in its purest form may have been used by these two cultures, it was a not terribly commonly .

Factoring gained popularity around the time of the American Revolution when colonial merchants sent raw materials like cotton, fur and timber to British and European merchants. Because of the great distance across the Atlantic Ocean, waiting for payment from Great Britain and Europe caused delays in processing orders.  As a solution, the merchants paid the colonists in advance in order to have the means to process new orders.  This form of factoring provided cash flow for the colonists and allowed them to ensure that trade was uninterrupted.

As the business world progressed so did factoring.  The focus of factoring shifted to the importance of credit during the Industrial Revolution taking into consideration the customer’s credit worthiness.  Businesses could now use the amounts owed them as instruments of payment based on their credit worthy, established customers.

During the 1930’s factoring grew considerably among the garment and textile industries which relied on raw materials.  Factoring was commonly used to ensure that companies were able to purchase these materials to produce clothing and textiles without delays.

Today, factoring is a respected alternative to traditional financing.  Many businesses large and small sell their accounts receivable to obtain much needed working capital.  Nearly any business with credit worthy customers can take advantage of factoring as a steady source of cash flow for daily operating expenses, to purchase new equipment or growth.