What is business factoring? If you ask this question to ten random strangers on the street, chances are one or none of them will be able to give you the right answer. It’s quite odd really, considering that factoring played a very big part in developing modern commercial finance, and is a very common concept of financing with many forms still being widely practised today.

Where It All Began

Factoring essentially involves the selling of invoices at a discount to factors, and has its roots in ancient Mesopotamia where early civilisation created the concept as far back as 4,000 years ago. Mesopotamia was a thriving trading society then, located in the area of the Tigris and Euphrates rivers. It is considered to be the cradle of civilisation in the West, and rightfully so. Merchants of Mesopotamia would hire agents to travel to distant cities in order to buy goods and bring them back to the merchant who would then resell these goods. In order to do this, merchants would make cash advances to these agents, who in turn gave them promissory notes. These notes could be payable to the merchant, but they could also be sold to merchant bankers at a discount, and this is how the early concept of factoring was born.

Later Development

There are evidences that early forms of factoring also existed around 500 BC in Babylonia, Greece and Rome. Roman officials and nobles often entrusted their goods and property to agents called factors, who would pay the noblemen in advance, find buyers for the goods and receive commission for their services. Tablets also reveal laws that governed the approval of credit and how receivables could be assigned.

But it wasn’t until the medieval period that factoring became more defined and more like the way it is now. During the fourteenth to seventeenth centuries, England was immersed in the cloth trade, with its centre of business being Blackwell Hall. Here, all kinds of woollen fabric from all over the kingdom were stored and sold, and the factors would act as agents for the woollen manufacturers. They would extend credit to cloth makers and trade or sell the fabric themselves. They became middlemen, trading wool as well as finished cloth and offering credit to merchants who had limited finances.

Eventually, factors became very well known around England and extended beyond the textile industry. By the 1700s, there were already corn factors as well as hop factors. They also began spreading throughout all the major trading areas including Russia, Spain, France, Portugal, Germany as well as America, with the Pilgrims. And beginning in the late 1800s, factoring flourished in America with the establishment of several asset-based lenders and commercial finance companies.

Factoring Today

Business factoring, otherwise known today as invoice discounting, invoice finance, debtor finance, cash flow finance or receivables finance, is now entered into by several businesses and industries.

Many businesses have benefitted greatly from factoring, and it continues to evolve along with innovations in technology. There’s no doubt that in the coming years, factoring will continue to play a big role in providing companies with regular cash flow.

By Debra Wright

Debra Wright keeps tabs on all things new in the world of financing. Aside from using this information in her current line of work, she seeks to help and inspire others by writing about her newest discoveries. Keep tabs on Debra @debrawrites