It is amazing how many business owners come to us in search of debt factoring after having only heard of it recently. It’s not uncommon for them to believe that factoring is a modern phenomenon only made available within the last 10 to 20 years. But this is not the case. Debt factoring may be a practice as old as business itself.
Debt factoring is the practice of selling receivables to another company (known as the factor) at a discount. Every factoring company determines its own discount rate. By purchasing receivables at a discount, the factoring company can make a profit as each account is paid in full.
Also known as invoice factoring, debt factoring is a tool for managing cash flow, raising emergency cash, or funding other business operations without taking out small business loans. It is a fairly common practice among businesses of all sizes.
Debt Factoring in Europe
We are not exactly sure where or when debt factoring started. However, we do know that it was prevalent in Europe as early as the 13th century. A rather detailed discussion of European debt factoring is William Hurd Hillyer’s Four Centuries of Factoring published in 1939.
Hillyer’s writing discusses debt factoring in England just prior to the 1400s. He suggests that the Pilgrims brought the concept to North America in the early 1600s. Likewise, historical records indicate that debt factoring was an important business practice that helped fuel the development of the New World.
Informing the Debtor
Interestingly enough, it took hundreds of years for Western governments to officially get on board with debt factoring. For the longest time, laws did not recognize the practice unless the debtors involved agreed to it. In simple English, a company had to contact a debtor and inform them of the intent to sell that debtor’s invoice to a factor before it could be done. Otherwise, the law would not recognize the factoring as legal.
Here in the U.S., state laws did not begin eliminating the need to inform debtors until the 1940s. By 1949 though, nearly all the states had limited the requirement to inform debtors. These days, your company can engage in debt factoring at will. You only need to find a factoring company willing to work with you.
An Evolving Form of Finance
Based on the history of debt factoring around the world, we can confidently say that it is an evolving form of finance. It also works differently in different countries. There are even differences in how various industries utilized the practice. For our purposes, it is pretty straightforward. We purchase invoices from clients and apply our factors. When debtors pay their bills, we recoup our costs plus a profit.
Note that debt factoring isn’t limited to small- and medium-sized businesses. Large corporations utilize the practice from time to time. Importers and exporters turn to a unique type of debt factoring to keep their operations running while they settle complex transactions across borders. Even governments utilize a specialized form of debt factoring.
It could be that this financing practice is as old as business itself. That would make complete sense, given the tendency of human nature to establish working practices and then let them evolve. Who knows? Merchants could have been selling their receivables to factors thousands of years ago.
If you need access to cash and have receivables to sell, consider debt factoring. It is a fairly simple practice that is straightforward and fast. Feel free to contact us for more information about how our debt factoring service works.