The History and Use of Invoice Factoring

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Over the past few years, banks have considerably reduced the number of loans they issue to small businesses. According to The Wall Street Journal, this is due to the weak demand, high costs and tighter lending standards that followed the 2008 economic crisis. As a result, many entrepreneurs have turned to alternative financing solutions, like invoice factoring. Invoice factoring involves a factoring company purchasing a business’ invoices, and then quickly advancing working capital to the business against its unpaid accounts receivable. The business is leveraging its unpaid invoices to generate cash on hand.

Believe it or not, invoice factoring is not a new concept. The need for a business to be able to raise funds has existed as long as trade and commerce have. One of the oldest forms of business financing, the history of invoice factoring goes back 4,000 years to Mesopotamia. From medieval businessman and English colonists to the modern services we see today, invoice factoring has an extensive history.

 

Factoring in the Ancient World

In ancient Mesopotamia (what is now modern-day Iraq, Kuwait and Syria), a form of factoring was first used in traders’ business dealings. The factoring rules of the ancient Mesopotamian culture were laid out in the Code of Hammurabi. This well-preserved Babylonian law code of ancient Mesopotamia dates back to around 1754 B.C. Even though the Mesopotamian’s civilization later became extinct, factoring survived. Some form of factoring was used by each civilization that followed, including the Romans. Known for utilizing and improving upon inventions and concepts, the Romans were the first to sell discounted promissory notes at discounted prices and to conscript collectors to settle their trade debts.

 

1300s & 1400s Invoice Factoring

The modern form of invoice factoring began to take shape during the 1300s. Events that took place across Europe called for this form of financing for different types of merchants. During the 1300s and into the 1400s, Jews fled to Italy to escape the persecution taking place in Spain. Prevented from holding ownership of land in Italy, but allowed to engage in local commerce in grain crops, they began charging a fee for the use of cash. Essentially, these early merchant bankers offered high-risk loans to the farmers against the crops in their fields. As this service grew, the merchant bankers began advancing money against the delivery and payment of grain shipped abroad. Moving the focus further north, factoring was also beginning to be used by clothing merchants in England.

 

Use of Factoring in the 1600s & 1700s

By the time English colonists began making their way across the Atlantic to America, invoice factoring had become a common business practice. Both the East India Company and The Hudson Bay Trading Company used invoice factoring, as the British Empire sought to colonize the New World. Due to the distance and time it took for settlers to obtain their materials from England and then ship their goods (cotton, timber, tobacco, fur, etc.) back, merchant bankers in London found it was necessary to advance funds to colonists for the materials they needed – or face bankruptcy. Whether the goods were being shipped to the colonists or back to England, the factor would pay a discounted rate to the seller before the voyage. Once the goods had arrived at their destination, a percentage was withheld for the sale and the money owed was collected.

Modern Factoring in the 1900s

At the start of the 1900s, garment and textile companies in the U.S. used invoice factoring to ensure they could continue to purchase raw materials. It wasn’t until after World War II that invoice factoring began to expand to other business types and industries in the U.S. By the mid-1940s, some U.S. banks were beginning to provide companies with factoring services. Fast forward to the 1960s and 1970s, rising interest rates and bank regulations made invoice factoring an increasingly popular solution. Unlike traditional financing options, invoice factoring did not involve the same credit checks, and it allowed business owners to avoid similar interest charges. By the 1990s, major banks like GE Capital and GMAC began incorporating factoring into their services.

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Moving into the 2000s, smaller factoring companies began to emerge that targeted the needs of specific industries. Technological breakthroughs – like Internet access, cloud-based platforms, etc. – also made invoice factoring more accessible. Rather than waiting weeks to hear back from a traditional bank, businesses could secure the cash they needed in as little as 24 hours.

In the past, invoice factoring was easier to access for larger companies. Today, invoice factoring also offers startups, small businesses and midsized businesses the cash flow they need to cover expenses, boost growth and fund expansion. The biggest advantage of invoice factoring is that the business is given cash it has already earned, allowing it to avoid unnecessary debt and risks. Ultimately, this working capital provides the business with the flexibility it needs to operate from day-to-day, without cash flow issues.

Security Business Capital has built a dedicated team of individuals with years of expertise in offering flexible cash flow solutions that help businesses grow and thrive - minus high interest rates and costs. Security Business Capital’s invoice factoring services allow your business to use its unpaid accounts receivable to generate the cash you need quickly and easily. There are no hidden fees involved, and the application and setup process is simple and hassle-free. Oil and gas services, temp staffing, manufacturing/distribution and transportation are just a few of the business types that can take advantage of Security Business Capital’s invoice factoring services.
If you would like to learn more about Security Business Capital’s invoice factoring option (or our other service options), simply contact Security Business Capital for a free quote and/or consultation.