The Wheel and Accounts Receivable Financing

Photo of a wooden wheel

In business, when starting a new project, you often hear someone say, ‘don’t reinvent the wheel.’ This colloquial metaphor is based on the fact that, while the wheel has been modified and improved since its invention 5,000 years ago (around 4200-4000 BCE), the basic round design has never changed.

Interesting to note that the Mesopotamians, the inventor of the wheel, also invented Accounts Receivable Financing. Mesopotamia, located in modern-day Iraq, Kuwait, Turkey, and Syria, is said to be the cradle of modern civilization. The history of the Mesopotamians is marked by many important inventions that changed the world, including the concept of time, maps, writing, sailboats, animal domestication, bricks, man-made glass, and mathematics.

Map of ancient Mesopotamia

Long before it had a name, purchasing goods and paying for them later on account was an option since the beginning of commercial commerce. The term accounts receivable dates back to Mesopotamia 2000 BCE, and a form of factoring was developed, similar to what we use today.

The first official rules of accounts receivable were made available in the Code of Hammurabi, a collection of 282 rules that established standards for commercial interactions, setting fines and punishments to meet the requirements of justice.

Code of Hammurabi photo

Hammurabi was the sixth king (1792 to 1750 BCE) in the Babylonian dynasty, which ruled in central Mesopotamia (present-day Iraq) from 1894 to 1595 BCE. Hammurabi’s Code, carved onto a massive finger-shaped black stone pillar, was looted by invaders and finally rediscovered in 1901.

Moving ahead 3,000 years to around 1300-1400 CE, accounts receivable became a more popular form of business transaction as the importing and exporting of merchandise, mainly clothing, over long distances meant that merchants had to wait for payment after the delivery. With accounts receivable financing, the merchants immediately received a portion of the payment due, which covered the costs for equipment and supplies.

In the 1600s, the colonists of the “New World” used accounts receivable to export the newly discovered raw materials of tobacco, fur, cotton, and timber back to England. The colonists would offer cash advances based on the customers’ accounts receivable strength.

With the industrial revolution of the late 1800s and early 1900s, accounts receivable financing became even more popular, and extenders of credit began looking at the “creditworthiness” of a customer. Industries like textiles, garments, and transportation started using accounts receivable as a significant source of their financing. They began using factoring as a way to continue to purchase their raw materials. Accounts receivable financing allowed them to deal with long sales cycles when transportation and distribution of goods were not yet quite reliable.

In the beginning, the factoring of accounts receivables was a business-to-business enterprise. However, by the 1940s, some U.S. banks began offering accounts receivable factoring, reaching a volume of $2.5 billion in 1948 ($30.723 billion in today’s dollars).

The modern factoring industry underwent significant change in the 1970s and 1980s as banks gradually acquired factoring businesses. As a result of this consolidation, interest rates began to climb exceedingly high, regulations tightened, and the high level of service that was a traditional element of factoring began to diminish. Realizing that many small and medium-sized business needs could be satisfied simply by advancing cash against specific receivable accounts, a sizable number of independent factoring companies opened their doors to fill this market vacancy. Today, there are about 800 factors servicing hundreds of thousands of small businesses.

The invoice factoring industry has grown significantly in the United States in recent years. Attributed to the financial collapse of 2008 and the bank’s reluctance to offer up small business loans, invoice factoring has increased by more than 15% since 2004. In addition, banks have made applying for loans more difficult and time-consuming. With more restrictive regulations surrounding traditional financing and lending, businesses without a near-perfect credit score and record of profitability are finding it difficult to qualify for a loan.

According to the Secured Finance Market Sizing & Impact Study 2019, there is an estimated $101 billion in factoring volume generated by US factoring firms annually. It is estimated that 16 factoring firms represent 90% of the US market on a dollar basis but only comprise 2% of the total count of firms offering factoring solutions. The US factoring market is fragmented not only by the large number of firms that provide factoring but also by factoring’s usage among tens of thousands of small and medium enterprises. The even larger number and broader variation in clients’ customers (the account debtors) mean that factoring’s presence within the secured finance market is widespread and diffuse.

Factoring receivables remains more accessible to those businesses with less-than-perfect credit scores seeking capital. Start-up businesses and new firms are also considering this option for funding because many banks require your business to be established 3-5 years before offering financing. Even some businesses that might qualify for traditional financing are turning to invoice factoring because it is faster, less restrictive, and more flexible.

Standing on more than five thousand years of history, the practice of factoring accounts receivable is likely to continue to the foreseeable future providing businesses of a variety of industries, sizes, and functions a way to obtain cash quickly to improve their cash flow, manager their receivables, pay their bills on time and much more.

When it comes to factoring companies, choosing one with whom you can build a personal relationship is important. It is important that the factoring company understands your business and is accessible when you need them.

Business Finance Corporation(BFC) has been providing factoring services to businesses in Nevada, Northern Arizona, Southern Utah, and Southern California since 2001. Since its founding, BFC has provided hundreds of millions of dollars in accounts receivable financing to companies of all types and sizes. BFC clients use factoring to maintain cash reserves and ensure they have the money to make payroll, purchase inventory and raw materials, pay creditors, purchase equipment, and pay taxes. With a working line of capital in place, BFC clients sleep comfortably at night, knowing they have a financial partner at their side. Call BFC today at 702-947-3800 or go to https://bfc.vegas/ to speak with a representative.

Your Partner in Success,

David Cabral