History
The history of factoring goes back to Ancient Rome, where wealthy producers and merchants used an intermediary/factor to manage their goods trade. Records show that the use of these factor intermediaries followed an evolving course throughout the Middle Ages.
During the colonization period of European countries after the 16th century, those who exported consumer goods from their homeland needed the help of these intermediaries in order to increase their trade.
This phenomenon was especially important for the USA. The rapidly increasing population in the 19th century showed an increasing demand for European goods, mainly textiles.There was also a need to keep goods in stock in order to respond promptly to demand.
The services of these factors often included taking;
- Physical ownership of the Goods on consignment,
- Warehousing
- Finding buyers and delivering the goods to them,
- And collecting from Buyers.
The factor receives a commission on the value of the goods sold for these services and this fee is deducted from the payments made to the seller.
Increasing numbers of factors gradually gained the ability to support exporters by giving loans in return for the goods sent to them on consignment.
The guarantee of these loans was the factor's right to reimburse itself from the sale of the goods. This right was later registered with the enactment of the Factors Law, which gave the factor the right to put mortgages on the seller's goods.This right gave the factor the authority to keep the goods in its possession until the loan was repaid.
In the second half of the 19th century, the role of American factors changed dramatically. The development in communication and transportation systems left no need for the exporter to send their goods on consignment.Products started to be sold directly to the buyer by sales agents working using samples. Therefore, exporters no longer needed factoring storage, marketing and distribution services; however, they wanted to continue to benefit from their financial services. The legal basis of these financial services was that the factor sold the products and covered the financing costs from there.However, in the changing environment, this system was no longer functioning. The exporter's receivables from direct sales to the buyer had to be assigned to the factor. Factoring started when the factors recognized the needs of their customers in this changing environment.
Creating finance through the assignment of receivables has been practiced in Europe for centuries. The buyer was not notified when the assignment was documented with copies of the invoice.This practice was common in the 1950s, especially in London. The simplicity and confidentiality of the transaction was very attractive to firms seeking to create additional financing.
Factors were mistaken in thinking they had the same security as policy discounters. Many factors suffered serious financial losses with the bankruptcy of major vendors.
In addition, buyers' return of goods or deductions from receivables without prior notice left unprotected factors in a difficult position.
This experience was later combined with the American model, encouraging the method of undertaking on the basis of total turnover they would receive in the 1960s. Although the transactions were sometimes recourse and sometimes non-recourse, the buyer was always notified.The funder was collecting from the buyer. In other words, this was factoring in the modern sense.
In Southeast and East Asia, the instrument of payment guarantee and financing was the letter of credit, at least until the early 1980s. However, in the development of factoring in the United States, the communication and transportation revolution had brought about the fact that letter of credit was no longer appropriate.With increased demands created by competition, buyers were unwilling to commit to funds for products they did not receive and inspect. This was also the case for Asia Pacific exporters who wanted to increase their trade volumes with European and American buyers.Therefore, the development of factoring in this region followed a course parallel to the increase in foreign transactions. However, FCI statistics show that domestic factoring has also increased rapidly in this region.
This financing instrument, which has made great progress since the establishment of today's modern factoring concept in the 1960s, has become an indispensable part of trade with the significant contribution of institutions such as FCI.