When did factoring begin?
One of the earlist mentions of factoring is found all the way back 6000 years ago in the era of Mesopotamia. Factoring in this time was as simple as an advance of cash given in order to purchase goods. With the advance of cash, the lending party was returned a promissory note that indicated the amount that was lent out. The note would most times also indicate what goods where to be purchased with the money that was lent out. Interestingly enough, similar to factoring today, these promissory notes could be purchased at a discounted rate by a third party, and then the payment or goods purchased would be owed to the third party.
While Mesopotamia may be one of the first mentions of factoring, Medieval England is noted to be the start of factoring as we know it today. Beginning in the 14th century, Blackwell Hall was the grounds for clothing merchants to conduct trade. Factors emerged and became middlemen between the people who made the clothes and the people who sold the clothes. Factoring grew throughout this time in Blackwell Hall, and regulations were formed in the early 17th century. Factoring in England expanded past the clothing industry, and soon spread throughout other European countries.
Factoring in early America
In the early 19th century factoring became physically present in America, and started in New York. These factoring companies all came over from Europe and it wasn’t until halfway through the 19th century until the first factoring company was created in America. Furthermore, modern factoring in America started at the end of the 19th century to the start of the 20th century. Where factoring moved away from only financing consigned inventory, and now included fronting cash for accounts receivable.
Halfway through the 20th century banks began to factor, and there is over 2 billion dollars worth of factoring taking place in America. Enough for the American way of factoring to be introduced over into Europe, the place that originally brought factoring to America. From here factoring grows into where it is today, with many banks acquiring factoring companies, and an increase in smaller specialized factoring companies.
Today the U.S. factoring market size is around 150 billion dollars and estimated to continue to grow. The continued growth of factoring is fueled by the increase in SMEs (Small and Medium Enterprises). There are more SMEs now then there have been before, and they are seeking alternate ways to finance their businesses. Factoring is a great option for SMEs because of the increase to cash flow that factoring offers, and this is crucial in times where the amount of orders is increasing for a business. The interest provided by factoring companies can also be lower than a loan, especially for SME’s (Small and Medium sized Enterprises).
Factoring today has two main ways to structure a contract. There is recourse factoring, where the company must take responibility for any invoices that the factoring company cannot collect payment on, and non-recourse factoring, where the factoring company takes the risk for non-payment from the customer. Recourse factoring usually comes at a lower interest rate, where you pay around a percentage or more for non-recourse factoring. These types of factoring occur for qualified accounts recievables or invoices, depending on the services the factoring company offers.