History of Cashflow Finance - Cashflow Finder

Invoice Discounting and Factoring Cashflow Finance History

The earliest recorded use of Factoring was over 4,000 years ago in the Middle East, where it was used in the financing of trade. The financier was typically a merchant or middle man who advanced cash to the producer and took physical possession of the goods until delivery to the purchaser, who then paid for the goods. The producer received cash before the purchaser paid for the goods, allowing the producer to immediately get on with producing more goods.

Factoring took many forms over the following centuries as its use spread from the Middle East to Europe but remained closely associated with trade. The extent of the influence over trade of the new ‘Factoring Houses’ in England resulted in an Act of Parliament in 1696, to curb the power of the Factoring Houses, who had established a near monopoly. In the formative years of the American colonies, Factoring Houses provided the cash lifeblood for the colonists by advancing funds against their commodity exports to Europe. The constantly growing volume of world trade was largely financed by some form of Factoring through to the 21st century and continues to grow.

The industrial revolution of the 18th and 19th centuries saw the development of the modern form of Factoring, which moved away from the merchant type physical goods approach and took up the emerging problem of credit risk. Factoring became more of a conventional financing tool, with the Factoring House assisting in determining (and often assuming) the purchaser credit risk, an important feature in times where creditworthiness information was not readily available.

After the Second World War, the growth of world economies and expansion of trade created huge demand for financing, and Factoring was an obvious choice. Many Banks and newer non-bank financial institutions took the opportunity to establish Factoring operations and volumes of business increased significantly. Modern factoring typically included various services including debtors’ ledger management, creditworthiness assessment & collection of debts in addition to the advancing of funds against sales invoices. Another form of Factoring was also developed, called Invoice Discounting, which introduced the concept of a finance only facility, which was not disclosed to the Client’s purchasers. This ‘confidential’ factoring facility was initially only available to very large companies but has become more available as Factoring Houses gained more experience and developed more sophisticated risk models.

In Australia, finance companies have been providing Factoring facilities since the 1960s and Invoice Discounting facilities since the 1990s. The main trading banks also started offering Invoice Discounting facilities in the 1990s and have built very large businesses in this area. Together with a number of large and small non-Bank providers, Factoring & Invoice Discounting facilities are widely available in Australia to businesses of all sizes and types. Growth in Factoring & Invoice Discounting in Australia has been remarkable with the latest industry figures showing annual volume of sales financed of $55 billion, which is a threefold increase over the last 5 years.