The Past

Factoring, the financing of accounts receivable, has been practiced for thousands of years. There is a debate among historians as to the origination of factoring. Some believe that factoring originated in 2,000 BC in the days of King Hammurabi of Mesopotamia. While others believe that factoring can be traced back even further, to 3000 BC and the days of the ancient Phoenicians. The Phoenicians, who called themselves Canaanites, supposedly used a primitive form of factoring for the extensive trading they conducted. Although Mesopotamia and the Phoenicians no longer exist many of their great contributions to civilization have endured, factoring being one of them.

Factoring can also be historically traced to the time of the Romans who were known for selling promissory notes at a discount. The word ‘factor” itself is Latin, meaning “to do” or “to make.” Factoring was then passed along from civilization to civilization until its widespread use in the American colonies. During this time trade was the main source of income for most colonists. With the abundance of the North American landscape, colonists cultivated and traded commodities like cotton, fur and timber with the Europeans. Merchant bankers in Europe advanced funds to the colonists for these raw materials, before they reached the continent. This enabled the colonists to continue live and work, free from the burden of receivables from their customers.

With the arrival of the Industrial Revolution, factoring evolved and became more focused on the issue of credit. By helping clients to determine the creditworthiness of their customers and establishing credit limits, factors were able to guarantee payment for approved customers.

Then in the 60’s and 70’s many private factoring companies developed as interest rates rose to new heights. This trend continued to grow in the 80's, primarily due to increasing interest rates and changes in the banking industry. As banks became more expensive and inflexible due to heavy regulations business owners were forced to find other sources of financing.

The Present
Throughout history, factoring has continued to be used all over the world, where today, it is most commonly practiced in Europe. Ironically, most American’s are unfamiliar with the factoring industry despite its strong contribution to the health of the U.S. economy.

In the 1980’s savings and loan scandals rocked the banking industry and forever changed the regulations surrounding traditional banking. Banks became more tightly regulated and small business loans became harder to obtain. The restriction to the money supply hugely impacted the start-up and growth of small business leaving factoring as one of the few financial options available for small to mid-sized businesses. Today, it is the investors and lenders of factoring companies that help sustain the small to mid-sized businesses of the U.S.

The Future

Factoring is one of the few industries that people refer to as recession-proof. When the economy is strong, businesses need cash flow to increase their business. When the economy is slow, banks increase their lending requirements and more businesses turn to factoring to sustain.

What does the future hold for business-to-business factoring in the U.S.? Will the middle class diminish and with it the need for factoring? Will factoring continue to bridge the gap small and mid-sized businesses need to survive in a Wal-Mart driven economy? The answers are not always clear but the need for factoring will always be prevalent as long as there are small to mid-sized businesses that need cash flow.