A History of Factoring Through the Ages
Factoring is one of the oldest forms of commercial debt, dating back to the Roman Empire. The technology to support it has changed a lot with time, but the basic idea is still the same. Entrepreneurs have business cycles that include a delay between sourcing or building goods and selling them. During that slow season, they need cash to keep going, so factors provide it to them based on their history and the assets involved in the transactions. Today’s factors provide services like invoice financing to give you access to money your company has already earned before your customers pay.
Factor Lending in the Roman Empire
Roman factors typically provided a loan against a future harvest or the proceeds of a trade expedition, giving the merchants capital they could use to finance everything from labor to equipment to the raw materials they’d need like goods, seed, or livestock. When the harvest came in or the caravan came back from selling goods, the factor would receive payment. In a lot of ways, the practice shared features with modern commodities trading.
Factoring During the Middle Ages
Many kingdoms and nations had prohibitions against interest-based lending during the middle ages because of church doctrine around the subject at the time. Factors could work around that by offering the service for a flat fee, providing the documentation of the deal was handled correctly. It worked as a handy way to manage debt while staying in-bounds with the religious authorities.
Moving Toward Modern Versions of the Factor
As the church’s influence over financial transactions waned, factors turned to using interest-based figures to communicate costs once again. During the early capitalist period known as the Enlightenment, the process financed many of the expansionist movements that built European monarchies into global empires. The investment companies organizing the colonies those empires depended on typically used it as a way to finance their projects.
There are a few types in use today, but the most common one is invoice financing. As mentioned in the introduction, it provides business owners with a way to access money they are owed before the customer pays. That makes it a powerful cash flow management resource that can be used as often as you need it. The more business you do, the more invoices you have available when you contact a factor. Make sure you review the options for structuring fees and payment, because your expected repayment window can affect costs a lot, and different lenders have different philosophies about pricing.