History of Invoice Factoring
Invoice factoring is not a new financing method. In fact, the earliest use of invoice factoring can be traced back to 4000 years ago in Mesopotamia, with businesses needing to raise funds for trade and commerce. From Mesopotamian merchants to English colonists to the modern iteration that we see today, invoice factoring has an extensive history.
Mesopotamia (1500 B.C.~)
The most primitive form of invoice factoring can be traced to Mesopotamia, a historical region comprising what is now Syria, Iraq, and Kuwait. The Code of Hammurabi was a Babylonian code of law that dictated the conduct for factoring, among the 282 other edicts of Mesopotamian culture.
Roman Empire (31 BC~)
Invoice factoring was also used extensively during the Roman Empire. The Romans actually improved upon the form of factoring that the Mesopotamians used by selling promissory notes at a discount and hiring collectors to settle their trade debts. Roman factors also helped merchants conduct financial transactions by buying and selling for them in far off lands and taking goods on consignment. Factors were crucial for Roman merchants looking to expand their businesses if their goods or crops had an off-season.
The modern iteration of factoring began to develop during the 1300s. Around this time in Europe, the Jewish were fleeing Italy to avoid religious persecution in Spain. They could not own land in Italy but were able to engage in local commerce through grain crops and began charging a fee for the use of cash. They would give high-risk loans to farmers against the crops in their fields, which eventually developed into upfront cash advancement against shipping and payment of goods delivered abroad.
The British Empire (1600s)
As the British Empire sought to colonize the New World, invoice factoring became a common practice. The pilgrims even used factoring to finance the construction of the Mayflower and the voyage to Plymouth Rock.
Due to the distance and time it took for merchants to obtain their materials from England and then ship their goods back, merchant bankers in London advanced funds to colonists for these materials so they could avoid bankruptcy. The factor would pay a discounted rate for shipped goods to sellers before the voyage. Once the goods arrived, a percentage was withheld for sale and money owed was collected.
The East India Company and the Hudson Bay Trading Company established their dominant merchant empire via invoice factoring.
Textile companies and manufacturers used factoring to purchase the raw materials needed to meet the rapid growth and expansion of their industry. After World War II, invoice factoring expanded to other industries and some banks in the US began providing invoice factoring services. In the 1960s and 1970s, invoice factoring became increasingly popular given the rising interest rates and stricter bank regulations.
Invoice factoring is a financing method that has been helping businesses for centuries, from the Ancient Mesopotamians to the Americans of today. It provides businesses with additional working capital and helps bridge the funding gap.
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