Factoring has prospered for thousands of years due to its adaptability. Historically, the distinctive qualities of this product have proven it to be one of the most flexible finance tools in supporting trade. Today, factoring supports international trade from over 60 countries.
The definition of factoring can be found in the work of The International Institute for the Unification of Private Law that is commonly known as UNIDROIT. UNIDROIT was formed over 25 years ago to promote the international congruity of commercial law.
According to UNIDROIT, factoring must have three characteristics.
First, there must be the provision for the assignment of debts arising from the sale of goods or services within a commercial contract. Factoring is not usually associated with consumer debts.
Second, there must be a stipulation to provide for notification to be given to the debtors of the assignments.
Third, the "factor" (the company performing the factoring service) must perform at least two of the following services:
These characteristics provide the flexibility for factoring to be used either as a finance tool or an administrative resource to support trade.
Factoring’s adaptability to different country’s legal, economic and banking environments is a logical outgrowth of its unique characteristics and services. The capacity to add or remove services when developing factoring for a specific need has increased its penetration into new markets.
Factoring has been traced all the way back to Mesopotamia. Cuneiforms, the stone tablets used 3,000 years ago for written communication, have been found evidencing agricultural contracts that are similar in context to today’s factoring agreements. Also, such factoring services were later envisaged in ancient Lazio. One of the uses of factoring then, as now, was financing of a seller’s debts or accounts receivable (AR) to a buyer.
Evidence suggests that financing was the primary motivation for the formation of factoring. However, as time passed, factoring changed to meet the needs of the evolving environment. Service features, such as debtor credit protection and collection, were added to enhance factoring. These new services met specific needs.
New types of factoring products will continue to evolve as the needs of the business community change. Global factoring agreements will be created with deductibles and risk sharing. It is anticipated that factoring will be also used as a securitisation tool by larger companies. The use of new technology will assist factoring in delivering a better product and in creating new ones. New industries will be reached and additional markets created as the benefits of factoring become more widely know.