This whole concept of faster cash flow in a company through factoring is not something new. It is connected with ancient Rome when wealthy producers and merchants sorted out their sales delivery to the customers by hiring agents known as “factor”. Past records show that they continued to be employed by the merchants and producers throughout the middle Ages. You will also find their traces with the ancient traders of Mesopotamia who used a form of factoring for dealing.
Taking Shape in Europe
The breakthrough was European colonisation in the 16th century when exporters of consumer goods hired them for increasing their sale rates. This tradition flowed into America in 19th century with the rise of bourgeois who preferred European goods, especially textiles. The merchants needed factors to control their stock and maintain proper flow in supply. As the influence of factors continuously grew they became more concentrated personalities for supporting exporters in expanding credit sales.
Like modern New Mexico invoice factoring companies, the right of factors sanctioned by the law where they get to possess a commission fee after successfully dealing in credit sales. They also grab an authority to retain the goods until some of the total amount lent is paid to them.
The Change in the Role
The change in the roles of factors was visible in the second half of the 19th century. The exporters did not feel any necessity to send goods on consignment because they were able to sell through salesmen who already possesses books and sample cases for directly approaching the buyers and sell them the goods. But that did not solve their problem of funding. This is when factors came with their new roles for receivables from sales made to buyers.
The financing through receivables is nothing new in Europe but it became popular in London in the 1950s due to its simple and confidential characteristics and also easier transaction methods.
The Modern Form
Factors did not enjoy same amount of security as in bill of sale discounters. They suffered huge losses when vendors went bankrupt. There are other cases when buyers returned goods without notifying the factors. This was quite a shocking situation for those ‘factors’ that did not have any protection to handle these positions.
This is exactly why the modern form of factoring took shape in the 1960s. Here the receivables matters were mixed with the American version of the same. In this new method, factors were accepting receivables in a turnover basis. Each of these transactions can be completed depending on recourse or non-recourse basis. The circumstances will influence this matter but in each time buyers will be informed on the assignment. This is what modern factoring is known today.
If you search the history of factoring in Eastern and South-eastern Asia then you can find about the letter of credit as the guarantee and also as an instrument for creating finance till 1980s. The hybrid version of new factoring has outmoded that letter of credit.
The increase in demand, competition had lead the decision of buyers where they no longer wanted to commit for funding unless they received the goods or at least had the chance to examine it. From the emergence of this new factoring in 1960s, financing instruments employed by New Mexico invoice factoring companies have evolved greatly. There are significant contributions from organisations like FCI that have made ‘factoring’ an essential part of trade in modern days.