Factoring is one of the oldest forms of finance. The ancient Babylonians and Romans used factors. The word “factor” means “he who gets things done” in Latin.

The use of factoring spread in England during Elizabethan times. Factors in Europe helped finance the fledgling Massachusetts Bay Colony established by the Pilgrims in 1620.

“The history of factoring is the history of commercial finance in America,” said David Tatge, an attorney at the Washington law firm Epstein Becker & Green PC, author of 2010 book “American Factoring Law.”

Through the 18th and 19th centuries, factors acted as sales agents for manufacturers, receiving goods on consignment mostly from European textile companies and selling them here. They paid the manufacturers most of the sale price up front, then paid the rest – minus their own fee – when the buyer paid.

After the Civil War, as large apparel and textile companies took shape in America, factoring companies started focusing domestically. That intensified in the 1890s as steep tariffs were enacted on a wide swath of European goods.

By 1900, American apparel and textile companies were mass marketing their products nationwide, finding their own customers in the process. That turned factors more into financiers.

“The American factor no longer acted as a commissioned sales agent,” Tatge says in his book. “Instead, the factor now emerged as a commercial financier and purchaser of its client’s receivables, while also making loans against the security of client-owned inventory.”

Factors also assumed the credit risk if the end customers did not pay or were late in paying, defined as “nonrecourse” in financial terms. In addition, they performed the bookkeeping and collection work on behalf of the manufacturer.

The first half of the 1900s saw the establishment of several prominent factoring companies that still exist, including CIT Group Inc. (founded in 1908), Heller Financial (1935) and Rosenthal & Rosenthal Inc. (1938).

The industry exploded in the 1930s, with the dollar volume of goods factored topping $1.1 billion by the start of World War II, according to figures that Tatge cites.

Shady image

By the 1950s, factoring companies branched out into new industries, including cosmetics, chemicals, glass, electrical appliances and furniture. Other types of receivables lenders also had come along: asset-based lenders that don’t assume title to those receivables as factors do, and recourse factors, who differ from traditional factors because they leave greater risk with the manufacturer.

The total volume of factored goods reached $3.5 billion by 1955.

For reprint and licensing requests for this article, CLICK HERE.