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A Brief History of Factoring

Factoring has been around a long time. It’s not just something that’s sprung up in the last few years, so where exactly did the process come from?

Invoice factoring is essentially a was of advancing funds for expected payment. As such, it’s been around in some form even as early as 4,000 years ago, used by the Mesopotamians and Romans in their merchant activities. However, this obviously wasn’t factoring as we know it today, but the basic principle remained the same.

Factoring really started to gain popularity when the American colonists started trading with Europe. The long delay between sending goods across the Atlantic and receiving payment meant that many merchants used factoring to get hold of their payment quicker. This meant they were able to afford harvesting, planting and processing new materials in order to sell them on as well. Factoring helped them to remain flexible, and meant they didn’t need to wait around for payment before carrying on with their business.

After the American Revolution and the start of the Industrial Revolution, credit became more important to factoring. This wasn’t so much to do with the company itself but more to do with the customers whose debts they wanted to factor. Factors would help firms ascertain which customers were most creditworthy and then factor those debts, helping to keep cash flow moving.

Before the 1930s, it was industries such as textiles and garment companies which used factoring – they relied on raw materials, and used factoring to make sure they could afford new materials. Post-WWII, factoring became more widespread amongst a range of companies which issued invoices. Later on, when interest rates started to rise in the 60s, 70s and 80s, factoring again became popular as it required fewer credit checks than bank lending, as well as having much lower fees and no interest rates on lending. Smaller businesses and start ups started to benefit from this extra option away from traditional financing.

Today, invoice factoring remains a good solution for cash flow problems for any business that issues invoices. Nearly any business with reliable customers and an invoicing system can make use of factoring, especially if cash flow is tight.

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