A Brief History of Factoring

An Ancient Source of Business Finance

Factoring is often referenced as having its roots traced as far back as the 18th century BC and the ancient Babylonians, although you can probably say this about all types of commercial finance.  At that time, the city-state of Babylon was ruled by the much celebrated Amorite king, Hammurabi, drafter of the Laws of Hammurabi.  Among its 282 decrees, these laws set forth various guidelines for merchant transactions of the day and rules for the repayment of certain types of business debts.  

True factoring-styled transactions become more recognizable at later points in history and particularly throughout the Mediterranean trade corridors.  Phoenicians, the greatest traders of their day, are said to have employed factoring-related finance transactions as they ventured to foreign ports. 

Characteristically, factoring services throughout the ages usually involved the service of warehousing goods and not just that of financing.  This important additional feature, unknown today, did not really fade away until the early 19th century.

Ancient traders depended heavily on trustworthy warehousing agents for their export goods who would:

Þ take physical possession of goods on consignment

Þ warehouse the goods

Þ act as sales agents and find buyers for the goods

Þ collect payment upon sales for the selling trader

In ancient Rome, it was common for producers to employ the services of a “mercantile agent” to manage the sale of and assure delivery and payment for goods.  There is also evidence that the Romans formalized methods and regulations for the sale of promissory notes at a discount, a direct characteristic related to modern factoring.