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It is common today for many to view Factoring as a new and creative way to finance businesses that do not otherwise qualify for what is viewed as “traditional” financing. This is not a historically accurate view. Those of us engaged in the Factoring industry or who provide goods and services to the Factoring industry need to remind ourselves of this periodically. We are engaged in a form of financing that is centuries older than, for example, modern banking. Modern banking, which is one of those “traditional” forms of financing has its antecedents in Italy, during the renaissance.
Factoring, is much older. It is, in fact, one of the oldest, if not the oldest form of financing known to man. There is significant evidence to indicate that Factoring was known in Biblical times. Fragments of writings from both the ancient Egyptians and the Phoenicians strongly suggest that the businessmen from both of these ancient peoples engaged in what we would today call Factoring. There is even more evidence, in terms of volume, that Factoring was common in ancient Mesopotamia. Many of the clay tablets from the region containing cuneiform writings, indicate that the businessmen of that area also engaged in factoring. The reason the volume of evidence is greater in the Mesopotamia area is that baked clay lasts longer than papyrus. Papyrus, a paper like substance is what the Egyptians and Phoenicians used in their record keeping. There is no reason to believe that Factoring was used any more in Mesopotamia than in the other two areas. It’s just that the records of Mesopotamia have greater durability. (Is there some lesson to be drawn from this?)
Factoring has not been documented as having been used by the Romans. However, the word “Factoring” has a Roman root. It is derived from the Latin verb “facio” which can be translated as “he who does things.” In Roman times this referred to the agent of a property owner, i.e., his business manager. Though the root word has nothing to do with the industry today, I like to think that it reflects the attitude and approach of the people in our industry, as they attempt to help their clients through their financial problems.
In Britain, Factoring began to be commonly used as a result of the growth and development of the wool industry. This occurred in the fourteenth century. The business ancestor of the commercial Factor, at that time acted as selling agent for the owner of a woolen mill. Initially this might be thought of as the middle ages’ version of a manufacture’s representative. The slowness of communications during those times made business transactions cumbersome, even over what we would now consider relatively short distances. The “Factor” of that day made all of the decisions for his area with regard to such matters as what may be the popular in his local market. He would then have the goods shipped to himself and he assumed the risk of getting paid for all of the goods he sold on credit in his area, i.e., he made the credit decision. It was in this way, that the commercial Factor, as we know it today, began to slowly develop and emerge.
In this system the Factor was assuming what we today call the credit risk. He also billed in his own name. His service to what was then viewed as the distant mill owner, was to be able to remit a large percentage of the unpaid accounts. He did reserve, i.e., hold back, 20-25%, on such accounts, to cover disputes and claims of defective goods, both of which remained the risk of the mill owner. He also covered whatever his fee was from the reserve. All of this of course sounds very familiar to us today.
Factoring arose in the United States during the 19th century, as a direct result of the inability of manufacturers to maintain constant and timely communications with their sales forces in the field. At that time, as is the case today, the sales force was paid by commission. If all sales were at the risk of the manufacturer, the salesmen had no incentive to exercise prudence in connection with whom he sold to on credit. On the other hand, the distant manufacturer was not in a position to make the credit judgement from afar. This gave rise to the practice of having salesmen assume the credit risk on sales. The risk of defective or non-conforming merchandise, remained with the manufacturer. The credit risk was now separated from disputes as to quality, workmanship and conformity of the goods. Soon after the salesmen began to act as independent sales agencies. It was common for them to act for more than one manufacturer. Still later the sales function was separated from the credit function and “traditional Factoring” as we know it had, at that point, developed in the United States.
There have been many developments and permutations in the industry since traditional Factoring emerged during the last century in the form we know and recognize today. All of these changes and permutations are beyond the scope of this article. The purpose of this article is solely to remind all of us of the long and useful history of our industry, which I am confident will continue into the new millennium.
Written by Patrick H. Stiehm for The Commercial Factor
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