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.

From the 1960s through the 1980s, waves of consolidation swept through the factoring industry, resulting in a number of the largest factors being controlled by major banks.

But the entry of the new players, especially some of the recourse factors, eventually led to the spread of the perception of factoring as an industry with shady elements. Some of the smaller, less-established recourse factors had limited access to financing themselves and charged their clients higher fees, sometimes more than 50 percent on an annualized basis. That led to the perception of factoring as a financing tool of last resort only for the most desperate of companies.

Tatge’s book refers to 1987 articles in the Wall Street Journal and Fortune magazine that express the perception:

“Historically, the factoring business has a smell about it, usually because firms that sell off receivables have tended to be strapped for cash. To get quick money, they sell their accounts receivable to last-resort lenders, typically at steep discounts from face value.”

Tatge rebuts this perception, noting that the American factoring sector since then has expanded into a huge industry, reaching $135 billion in volume of factored goods in 2007, according to a survey from the International Factoring Association in Pismo Beach. He told the Business Journal that recourse factors now account for about 25 percent of that volume; the other 75 percent are nonrecourse factors that take the hit themselves if end customers don’t pay or pay late.

L.A. market

The L.A. area, with its high concentration of apparel and furniture manufacturers, has long been fertile ground for factors. Tatge said established companies such as James Talcott, CIT and Walter Heller set up shop here in the 1950s and 1960s. Several smaller factoring companies also opened in the area, including Milberg Factors and Capital Business Credit.

Local banks, such as Security Pacific Bank and Crocker National Bank then entered the market through acquisitions. More recently, in 1999, Wells Fargo Bank also entered through acquisitions.

“The Southern California market, with its apparel concentration, has long been very competitive for factors,” said Robert Zadek, of counsel to the San Francisco office of L.A. law firm Buchalter Nemer.

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