Invoice Factoring History
The Early Evidence of Invoice Factoring
There is various evidence that implies that Invoice Factoring first emerged as a facility of commerce over 4000 years ago, however the principals were probably a little different to the invoice factoring that we know today. There is also evidence that the Romans used a kind of factoring by selling promissory notes at a lower price to aid in their cash requirements, however again this is probably only marginally similar to the invoice factoring of today.
Fleeing Jews
Invoice factoring as we know it now looks like it first emerged during the Middle Ages. In the 1300 and 1400 hundreds there were many Jews fleeing from the troubles in Spain and settling in Italy. While they were allowed to involve themselves and make a living from the local business they were not allowed to own land. This presented a dilemma as many of these Jews understood the profitability of land holding so they looked at a way of making money from land owners without actually owning the land themselves. An additional benefit to being a Jew in Italy during this period was that they were not bound by the same Christian laws as the local Italians which bound the locals to limitations on interest rates for money borrowed. This allowed them to provide high risk loans at higher than normal rates, usually for the sale rights of farmer’s grain. E.g. a farmer would receive monies for the potential grain sales that were due in the forthcoming harvest. Now obviously this was not a charitable offer and the lenders (or individuals providing the factoring) would make higher than normal charges based on the risk and the size of the harvest.
Merchant Bankers
This proved to be very popular and as with all good things they expand and grow, so in turn this kind of early factoring took off. Due to its success at the farmer level the individuals providing this type of finance looked at all stages of supply chain and ended up offering this financial service to the merchants as well. You could easily see how the term “Merchant Banker” came about for activities like this. This merchant factoring was an international affair as the bankers providing the factoring would pay money based on the sale and payment of grain in foreign trading ports in effect making money from both the farming of the grain as well as the trading of the grain. Invoice factoring as it was then spread from country to country especially throughout Europe.
The New World
The next notable milestone in the history of invoice factoring was when the English settlers appeared in the new world, America. Because the English factors and bankers were used to this kind of trade agreement there were huge possibilities emerging from the trade between Europe and the Americas. The benefits to a merchant of using a factoring service were compounded by the distance and times required to ship goods backwards and forwards between the two countries. In fact there was a much higher than normal risk that a merchant would go bankrupt while trying to transport their goods so in most cases the use of a factoring or merchant banking service was in some cases a necessity, especially for the smaller merchant.
Again this new world trade helped the success of invoice factoring to grow, albeit there were some limitations based on similar common laws in both countries. These laws stated that a debtor had to be notified in advance before any invoices were sold. However the opportunity to make changes to these laws came with the emergence of the United States which in turn created its own legal framework that included commerce law covering the use of factoring. That said it wasn’t until the 1940’s when the United States to all intents and purposes scrapped the notification of factoring agreements and adopted non-notification arrangements allowing again for a huge boom in invoice factoring. This relaxation in the laws was particularly useful to the textile and transportation industries which found a great benefit from the new invoice factoring legislation.
Invoice Factoring Today
This brings us almost to the present day, for the history of invoice factoring. It must be said that invoice factoring is more common place than most people imagine. We tend to think of invoice factoring being just for companies trading large invoice amounts. However the chances are that most people, especially in the developed world, use invoice factoring almost every day. This invoice factoring is more commonly known as a “Credit Card!” which is a form of invoice factoring. The seller is receiving their money for the good sold both quickly and without having to chase and follow up their own debts, and the buyer is receiving the goods with a promise to pay later the amount owed. On both sides both the buyer and the seller are paying for this service through transaction charges and interest rates.
So in fact Invoice Factoring is one of the most common financial trade mechanisms in use today.
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