While term loans and credit lines might be the most familiar credit products for many people today, there was a time when the go-to form of commercial financing was a factor’s services. The earliest records of this practice date back to the Roman Empire, at the height of its classical culture. Agricultural factors in the ancient world were considerably different from today’s firms offering cash solutions for unpaid invoices, however.
Much of the wealth of the ancient world revolved around trade in regionally-sourced resources, including food. While a bad season could leave merchants with little local produce to sell and a need to import at higher prices, factoring solved the issue of where to find the money by offering a way to obtain the inventory and sell it, paying off the factor in the bargain. Similar arrangements were available for the import of materials like copper or regionally-produced goods.
Colonial Expansion and Global Trade
From the late Middle Ages to the beginning of the modern era, factors provided ways for merchants and their investors to deal with the costs of global trade, financing everything from seed acquisition and planting costs at farms to the purchase cost of goods that would be imported for sale locally. The terms of the service changed with time, as factors attempted to serve a wider and wider pool of businesses. Eventually, those changes led to the modern version of the practice.
Modern Invoice Factoring
Today the service revolves around unpaid invoices instead of physical goods. That means it is useful to a wider range of companies than in the past, too. Today’s factors essentially purchase the right to collect your invoices at face value, assuming the risk of default as well as the labor involved. You will wind up with less than face value in the offer because that gap is where the factor’s chance to make money exists. The better your customers’ payment histories and fresher their invoices, the closer to face value your offer will get.
This structure allows any company that is awaiting payment for goods and services that were already delivered an opportunity to access working capital and discharge those invoices at the same time. Some companies build the cost of this service into quotes, making the practice of regular submissions of invoices a core part of the administrative workflow and outsourcing practically the entire receivables process. That’s a lot of efficiency from one financial instrument.