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History of factoring

Factoring is said to date back about 4,000 years to the cradle of civilization

Factoring is a well-established form of business financing that produces immediate cash payments to a company at the time of shipment, delivery and invoicing a customer. In its basic form, factoring, also know as invoice factoring, invoice discounting, invoice finance and account receivable factoring, has been used by American business since Colonial times, and its origins go back even further, literally thousands of years to the early days of commerce.

Factoring is said to date back about 4,000 years to the cradle of civilization, Bronze Age Mesopotamia, which included the Akkadian, Assyrian, Babylonian and the Sumer empires.

Later it was the Romans who began selling promissory notes at a discount - yet another form of factoring. However, the first documented use of factoring is said to have occurred in America some time before the American Civil War, when animal furs, cotton, and even materials such as timber were shipped from the colonies to Europe.

Others will tell you to look back in British history to the sixteenth century, when the new territories like the USA were being opened up and when most manufactured goods for those territories came from Europe. Owing to the slow communication and transport of these times, to sell in another territory it was a necessity to appoint an agent in the territory to find the customers, sell and deliver the goods for the principal and hold the principal's goods on consignment.

The early Factors combined trading, banking, accounting and shipping to facilitate trade and open up new commercial frontiers. Several commission companies (Factors) were formed in New York and were backed by European merchants and producers in Manchester, Liverpool, London, Paris, Lyons, Zurich, Hamburg, Bremen, Cologne, Amsterdam, Rotterdam, Antwerp and numerous other trading cities.

A great illustration of the role of Factors is the "cotton-Factors" in the United States in the early 19th century. Cotton was exported from the South to New York and Europe. Eighty percent of the U.S. cotton crop was sent to Europe. Extended transportation and warehousing periods caused long delays from the harvest until the payment from the spinning mill. Thus, the need for the Factor to advance money against orders became very important to the growers so the growers could continue operations while waiting for the payment the funds to travel back to them.

It is said that almost every civilization since that valued commerce has practiced in some form of factoring. 

Today factoring remains a global financing tool. Factors Chain International is a global network of leading factoring companies, whose common aim is to facilitate international trade through factoring and related financial services. They report that not surprisingly, the largest markets for import factoring are still the U.S.A. and a series of European Union countries where Factors Chain International is represented by all the local market leaders. Newer important markets for Factors Chain International import factoring are Taiwan, Japan, Hong Kong and China, illustrating that the international factoring concept has global application, covering more and more transactions in today's trading environment where the letter of credit is being replaced by open payment terms.

Currently the Factors Chain International network counts 247 factors in 66 countries, actively engaged in more than 80% of the world's cross-border factoring volume. For the calendar year 2008, Factors Chain International volume of 'international factoring' grew with more than 22% to EUR 114.4 billion. Factoring is now universally accepted as vital to the financial needs of small and medium-sized businesses. It has the support of government offices and central banks throughout the world.