Loans are about the simplest concept for credit that one could think of, because they’re literally just giving someone money they have to repay, with a finance charge attached. While they have been outlawed under certain governments and religions, records of them go back practically as far as we have records. What you might not realize is that factoring, a more sophisticated form of financing based on assets, is nearly as old.

Factors in the Ancient World

Factors rose in the ancient world, with records indicating they were used as far back as the Roman Republic, if not further. By the time Rome held an empire, it was a well-established practice. Factors were usually used for capital to take on trade ventures to foreign lands by leveraging a predictable asset like the food produced by a merchant or noble’s agricultural holdings. Past harvests were used as an indicator of the likely value of the harvest the factor would buy in advance, and then it was the factor’s job to line up sales of the goods.

This model also extended into factors being used to fund expeditions with the collateral being the trade goods that come back to port in cases where the trade venture was meant to bring home domestic goods and not just to sell locally produced ones. Both of these practices continued as dominant forms of factoring through the Renaissance period and colonial times. As modern forms of accounting began to evolve, though, factors turned their attention away from real goods and toward the value found in invoices.

Get Money from Your Invoices Today

When your business needs working capital, you can count on factors even to this day. Modern factors use invoices and sometimes purchase orders as the basis for providing capital, and there are a few ways to go about it. Financing the purchase orders or invoices provides a cash advance that you may have to repay if customers skip the bill, but not always. It is cost-efficient unless they skip out, and you keep the invoices on your books, you just let the factor collect.

The other option is to just go with factoring. In that case, you get to close those invoices and take them off your books. You will wind up taking less than the face value, but often the ability to totally outsource a company’s receivables will provide savings that offsets a lot of the cost. The factor then assumes the risks of nonpayment along with the responsibilities that go with collecting on the debt. It’s an easy way to simplify your accounting, especially for smaller companies.