Making use of factoring receivables in order to obtain quick cash payment for your invoices may be a new concept to many small business owners yet the practice has been around for hundreds of years. In fact it is one of the oldest business financing methods around. So even though the terminology used may make you scratch your head a bit, rest assured that financial services factoring is a reliable, tried-and-true way for securing money for your growing business.
The Origin of Factoring Receivables as a Financial Transaction
Going far back to the days of Mesopotamia, evidence has been found that a type of account receivable factoring was being used in this largely trade-based society. Area merchants would receive an advance by business financing agents to go out and secure finished goods from foreign markets. They would then sell this merchandise to area customers for a profit. The financing agents would produce a promissory note between themselves and the merchant delineating the terms of this agreement. The merchant could also borrow or trade against the note while waiting to receive and then sell the finished goods. In this way, these business financing agents acted like invoice factoring agents.
Factoring Receivables in the Middle Ages
Merchants who worked in the clothing, textiles, fabrics and garment trade routinely used factoring companies to fund their operations. Generally speaking, whenever manufacturing and distribution businesses needed to ship or export their finished products, there’s a strong probability that invoice factoring services were used. Evidence shows that from as early as the 1200s, variations of invoice factoring were used in countries and regions such as Italy, Turkey, Northern Africa, Spain, the Netherlands, France and more.
London’s Factoring Apparel Industry Booms
During the 1300’s factoring services prospered in London’s Blackwell Hall, the city’s popular garment district. Local clothiers and weavers wanted to expand their market and sell clothing items to larger London merchants. These merchants could sell clothing in bulk and also export the clothing and other finished products to foreign countries at higher margins.
Oftentimes, however, the clothiers themselves often did not have the capital available to produce the bulk volume of clothing and other finished products for purposes of exporting. As a result apparel factoring companies came onto the scene offering capital so that clothiers and other textile and garment producers could increase their work output. This way they could export bulk products selling them for higher margins. The apparel factoring company would collect a portion of the sale or invoice for advancing the production or manufacturing funds. These textile factoring agents would serve as the middleman between the seller and the buyer.
Colonial Businesses Regularly Relied on Invoice Factoring Services
In colonial times, the use of factoring receivables made the jump across the pond from England to the New World. Factoring services was commonly used to finance the shipping of raw materials from the colonies to the homeland of England. As it was a tremendously long and risky voyage, the suppliers could not wait for the shipment to be delivered before they collected payment. As such advance payment in the form of invoice factoring was commonly used. Because these agents took on considerable risk – many shipments never arrived due to being lost at sea – factoring receivables could be costly. Nonetheless, it was used regularly by many businesses as other financial institutions and banks were unwilling to finance these high-risk undertakings.
In the early 1900s, the use of factoring accounts receivables decreased somewhat in England and other European countries. The first and second World Wars slowed and limited international trade and a range of business financing institutions suffered as a result. Yet during this time, evidence suggests that factoring receivables was continuing to be used within the United States as the nation became more self-reliant. In this way factoring receivables continued to be used for international trade (importing and exporting) and also domestic manufacturing, distribution and shipping. That’s why even today, manufacturing and fabrication businesses continue to rely on invoice factoring.
Funding from Factoring Receivables Is within Reach for Most Businesses
In the United States, invoice factoring by industry has grown quite significantly in recent years. Attributed to the financial collapse of 2008 and the banks reluctance to offer up small business loans, invoice factoring has increased more than 15 percent since 2004. Banks have made applying for loans more difficult and time consuming. With more restrictive regulations surrounding traditional financing and lending, businesses without a near-perfect credit score and record of profitability are finding it difficult to qualify for a loan.
Factoring receivables remains more accessible to those businesses with less than perfect credit scores that are seeking capital. Start-up businesses and new firms are also turning to this option for funding because many banks require your business to be established 3-5 years before offering financing. Even some businesses that might qualify for traditional financing are turning to invoice factoring because it is faster, less restrictive and more flexible.
Invoice Factoring’s Story Continues to Evolve
Standing on more than a thousand years of history, the practice of factoring accounts receivable is likely to continue to the foreseeable future providing business of a variety of industries, sizes and functions a way to obtain cash quickly to improve their cash flow, manager their receivables, pay their bills on time and much more.