Factoring’s origins lie in the financing of trade, particularly international trade. Factoring was underway in England prior to the year 1400. It is closely related to early merchant banking activities and the Venetian trade model developed during the Middle Ages. Like all financial instruments, factoring evolved over centuries.
This was driven by changes in the organization of companies; technology, particularly air travel and non-face to face communications technologies starting with the telegraph, followed by the telephone, the fax, and the internet.
English common law originally held that unless the debtor was notified, the assignment between the seller of invoices and the factor was not valid. The Canadian Federal Government legislation governing the assignment of moneys owed by it still reflects this stance as does provincial government legislation modelled after it.
As late as the current century the courts have heard arguments that without notification of the debtor the assignment was not valid. In the United States it was only in 1949 that the majority of state governments had adopted a rule that the debtor did not have to be notified thus opening up the possibility of non-notification factoring arrangements. Now non-notification is widely accepted in major economies such as Brazil.
By the twentieth century in the United States factoring became the predominant form of financing working capital for the then high growth rate textile industry. In part this occurred because of the structure of the US banking system with its myriad of small banks and consequent limitations on the amount that could be advanced prudently by any one of them to a firm. In South Florida, it fueled trade finance to Latin America in the 80‘s and 90‘s.
In the latter half of the twentieth century the introduction of computers eased the accounting burdens of factors. The same occurred for their ability to obtain information about debtor‘s creditworthiness. Introduction of the Internet and the web has accelerated the process while reducing costs.
Today credit information and regulatory controls are in effect any time of the day or night on-line. Brazil has the most advance and controled check processing system in the world. Their POS systems provide background and activity information on the check writer to such an extent that in many countries it would be a violation of privacy laws. But then again, Brazil‘s total national default rate on checks is less than 2%.
Here’s a brief video on how Factoring works, Enjoy!