Using valuable currency and other desirable items for trade, as a very primitive and early form of financial exchanges, goes back to the early dawn of mankind. Obviously, humankind has come a long way from exchanging rocks and food to using sophisticated software platforms to track numbers. Like many things that have been developed by humans, the history of finance and factoring as we know it today can be traced back to many, many years ago.
As a high-quality working capital solutions and factoring company based in Atlanta with additional locations in Los Angeles and Burbank, The Commercial Finance Group believes that it is important to outline the history of our profession. Whether your capital solutions revolve around receivables financing, asset-based lending, or factoring, each one of these financial services all began with the simple exchange of basic currency. Let’s take a look.
Early Trading and Commerce
Raising funds has been a very important issue for businesses for a long time. For about as long as trading and commerce itself has existed, there have been needs to raise funds to fuel product purchases and meet expenses before a client pays their bills. As such, factoring is one of the most ancient and long-lasting forms of funding. But can we trace factoring back to any ancient documents or manuscripts?
Early Law
As it turns out, we can! The Code of Hammurabi is a code of laws created by the sixth Babylonian king, Hammurabi, back in the 18th century B.C.E. Though the entire code is not dedicated to factoring and various financial matters, part of Hammurabi’s code does set down multiple rules for merchants who wished to use factoring as a form of early funding. In fact, the Code of Hammurabi was so monumental in shaping the course of civilization and finance to follow, that students still study and discuss Hammurabi’s code today.
As Hammurabi laid down some of the rudimentary principles for commerce, trading, and financial matters including factoring, other forms of financing began to form. Civilization began to rapidly develop around the world, and factoring became a major funding option. Ancient Roman merchants, at one point, frequently used ‘agents’ to guarantee trade credits. Over time, in Roman society and eventually through Europe, these agents became known as ‘factors.’
Factoring and Medieval Europe
As time progressed, the concrete rules, forms, and framework of modern factoring and business funding began to form in Medieval Europe. Logically, the need for different forms of funding increased as trade began to increase.
In Medieval times, religious usury laws prohibited Christians from charging excessive fees for lending out money. Jewish agents saw the opportunity and filled the gap in the area of high-risk ventures that required high-interest rates. Jewish agents would provide cash advances to farmers and merchants with the corresponding harvest, or profits, being held as collateral. Essentially, these agents were the precursors to what would eventually become modern investment bankers. These early forms of cash advances for farmers and merchants solidified the practice of factoring as it continued to develop and mature in Medieval Europe, and would eventually set the stage of financing in the Renaissance and beyond.
Colonial Funding
Moving forward in history, by the time the American Colonies were founded, financial factoring had long been an established form of financing for European merchants. Factoring finance came to the New World along with commerce and trade. By now, the use of merchant agents to finance shipments of raw materials between the Colonies and Europe was basically a common, standard practice.
Here’s how it roughly worked: a merchant agent would factor shipments leaving from Europe and going to the American Colonies. The merchant agent would then take physical possession of said goods and take it to the place of sale. After these goods were sold, the merchant agent would take a small percentage of the sale before turning the profits back over to the seller.
This practice wouldn’t be sustainable for very long, however. Eventually, these merchant agents became even more efficient by not taking part in the physical movement of goods. Rather, the merchant agents would finance and insure credit on behalf of their client. Around this colonial time, the focus of finance factoring shifted to ensuring that the buyers involved in commerce were creditworthy. Thus, factors began to guarantee payment from creditworthy customers.
Growth Into the Modern Era
Factoring continued to evolve rapidly into the late 18th and 19th centuries. Factors would start venturing into new areas including selling crops, purchasing goods, and handling shipments of raw goods to market.
The dawn of the 20th century would see the growth of the textile industry, which would fuel the growth of factoring. In that sense, factoring and the textile industry, along with other high-volume product industries, would have a symbiotic relationship. It actually became a major source of funding in areas where banks were limited by law as to how much money they could lend. Factors, however, did not have these restrictions.
As such, this freedom with factoring consequently attracted other industries such as transportation and freight forwarding. To this day, many businesses involved in these specialty industries still continue to use factoring for their cash flow management and funding needs.
Modernization
However, as humankind raced into the post-WWII era of the 1950’s and beyond, the use of finance factoring actually became less prominent as the era of credit cards and various lines of credit began to become more popular. That being said, finance factoring did return to some level of prominence in the 1970’s and 1980’s as interest rates soared, prompting a greater need for finance factoring to help businesses effectively run their operations.
Today, finance factoring companies like The Commercial Finance Group offer thousands of businesses the ability and potential they need to grow and operate day-to-day without any cash flow issues. Modern factoring companies provide credit analysis of customers, maintain the accounts receivable ledger, and manage collections, to name a few primary aspects of today’s finance factoring industry. Despite this modernization, factoring still remains a respectable and viable financing option for businesses of all sizes in most industries.
Though factoring has greatly evolved since the early times of Hammurabi’s Code and the commerce that his code helped regulate, the core operation principles of finance factoring have not changed. It is true that the financial world has become a lot more complex, complicated, and sophisticated these days. Still, you and your business can have the confidence of knowing that The Commercial Finance Group uses the ancient foundational principles of factoring and finance matters and the best modern-day business practices to give your businesses the best cash flow management possible. If your business is in need of quality and trustable factoring services, don’t wait another day. Contact The Commercial Finance Group today!
