The History of Factoring – Business Financing Through the Ages

 In Invoice Factoring, Small Business Financing

Often when business owners hear about alternative financing options such as factoring, they think it’s a new type of business funding. As with most things that are new, there may be reservations or questions about its legitimacy. Factoring has existed in one form or another for hundreds of years and has helped businesses grow and thrive.

Early Business Factoring

The word “factor” comes from Latin and means “he who gets things done.” Throughout history and through today that is exactly what factoring does. It helps business owners get things done, allowing them to keep their business moving forward. Factoring has been used by businesses throughout history to expand and improve.

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Factoring can be traced all the way back to the earliest civilizations and is particularly evident in the Roman Empire. Rome is considered to be one of the first global empires and its merchants often did business in faraway lands. Factors made it possible for merchants to conduct business during slower seasons – as much of ancient business was based on agriculture. Factors also financed expeditions that helped business owners expand their customer base and increase their operations.  

Factoring continued to be used throughout the centuries across the globe. In England, The Hudson Bay Trading Company and The East India Company financed the growth of their global enterprises using factoring. The Massachusetts Bay Company had a team of factors operating in the American colonies for colonists in need of advanced payment on raw materials shipped across the Atlantic Ocean to England. The surge in the American textile business in the late 1800s and early 1900s helped establish factoring as a popular method of domestic business funding.

The 1970s and 80s saw interest rates rise and bank regulations become more restrictive. This increased the use of factoring, especially with small businesses. More factoring companies were established in the 1990s and the financial crisis of 2008 created a gap in small business funding that pushed factoring and other forms of alternative finance closer to the forefront of the industry.

Factoring in the 21st Century

Today’s factoring services are rooted in history and continue to help businesses thrive by providing them with additional cash flow when they need it most. Combined with technology such as cloud-based platforms and Fintech, factoring can be applied for and a determination made faster than ever. Yet, factoring is still often viewed with skepticism, which is a bit ironic.

Over 70% of US households have at least one credit card with 1.27 billion active cards. Credit card use is a common form of factoring which American retail depends on in order to thrive. In the credit card scenario, the issuing financial institution is the factor. When a purchase is made with a credit card, the seller receives payment immediately from the factor (financial institution), minus a percentage for using the service.

With credit card use so widely accepted, it raises the question “Why does factoring often get a bad rap?” as it is basically the same type of service. It only takes a few unscrupulous business people, in this case, factors, to damage the reputation of an entire industry. Throughout history, there were those who would require unreasonable percentages for their factoring services, causing distrust among consumers.

With the number of companies providing factoring services growing, they have to offer fair percentage rates in order to remain competitive. Also, factoring providers and other alternative finance companies are governed by state and federal lending regulations and are required to comply with contract and commercial law. Factoring can be a great solution for a business in need of short-term working capital.

Invoice factoring

Factoring with Capflow Funding

Capflow Funding Group will work with you to find the best funding solution to provide your business with immediate capital and keep your business moving forward. In addition to factoring, we also connect our clients to Purchase Order Financing, Inventory Funding, and Merchant Cash Advances. CapFlow services many different industries with a variety of different funding needs. Contact us today and find out how invoice factoring can help grow your small business.

 

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