If you’re looking for a definition of invoice factoring, it’s “the purchase of accounts receivable at a discount.” It is a proven funding solution, especially for growing businesses, and has been for centuries.
In fact, the roots of factoring can be traced back to maritime trading by the Phonecians in the Ancient World. Historians believe these early travellers, who sailed the Medetranian from roughly 3100 BCE to 539 BCE, engaged in trading via state-sanctioned trade centers and temples that also helped facilitate deals by providing funding. The concept evolved and took many forms. For instance, Hammurabi’s Code, the stone etchings from 1780 BCE that contain some of the earliest-recorded laws, discusses rules related to funding and documentation that are quite similar to those used today. Promissory notes became popular around this time, and later, third-party collectors and the buying and selling of promissory notes came into the mix.
However, it wasn’t until 14th-century London that the cloth trade brought forth the more modern concept of factoring. There, in a marketplace called Blackwell Hall, a group of people known as “factors” provided cloth manufacturers with raw materials, credit, and opportunities to sell their materials to drapers and merchants. Factoring then took to the seas yet again and became a common way to fund voyages, particularly those that set off and anticipated a profit. As the concept reached North America, it emerged as “factories.” York Factory on the shore of Hudson Bay in Manitoba is a prime example. Large organizations such as Hudson Bay Company operated expansive fortified complexes like this. Each had a “factor” who was responsible for tracking all the fur, goods, and money that passed through it.
Factoring has evolved into a fast-paced and sophisticated B2B financial service. Still, the core idea remains the same: a third party purchases a company’s invoices at a discount to enable the company to operate and raise capital for growth. The factoring firm advances most of the invoice value, collects payment on the company’s behalf, and then repays the balance once the customer has paid in full, minus a small fee.
Some factoring firms also offer added back-office services such as handling invoicing and collections. You don’t need extensive collateral, a high credit score, or long business history to qualify. Factoring professionals evaluate applicants based on their customers’ creditworthiness. Unlike bank loans, funds scale with the value of invoices, and most companies provide access to funds within 24 to 48 hours.