Invoice factoring has been used for centuries as a way for businesses to use their accounts receivable to generate capital; in other words, if you’re owed money in the future, you can leverage the amount you’re owed into funds today. Read on to learn more about factoring, including how factoring relationships work, some behind-the-scenes information on typical legal arrangements in factoring, and how the factoring industry got its start. Or for more information about our day-to-day factoring operations, read about our specific daily process.

The Early History of Factoring

TFW medieval wool merchants are net-90 and you didn’t factor

The term Factoring (as a means of financing) dates back many thousands of years, in one form or another.  Starting around 1200, in Britain, wool was an important export to Europe, and London merchants frequently used a form of factoring similar to what’s used today. Around the same (following Marco Polo’s pioneering trips to the Far East), European merchants would use factoring agents to help ship goods and spices on the long journeys across central Asia.  And when the Pilgrims traveled to the New World on the Mayflower, they brought with them the principles of factoring; within a short period, factoring agents were busy financing shipments of products from the colonies back to Europe.

Modern-Day Factoring Relationships

Over the past century or two, as factoring continued to develop as a preferred form of freight finance, factoring relationships became more standardized. Today, a typical factoring relationship (between a freight carrier and a factor) follows a few specific guidelines. Many of these guidelines have since become part of the legal structure behind the factoring industry (at least in the United States), but other aspects have developed merely as a “best practice” for the parties involved.

If you don’t know what’s in it, don’t sign it.

Assigning the Right to Payment

When a freight carrier and its factoring company enter a factoring agreement, the agreement typically allows the factor to “step into the shoes” of the carrier, for the purposes of invoicing and collecting payments on invoices. In legal terms, the carrier “assigns” the factor the right to payment on the invoice. This means that, as between the carrier and the factor, the factor now owns the right to receive payment on a carrier’s invoices.

Notice to Customers

But there is a potential hazard here: What about the carrier’s customers, who may not be aware of that the factor owns the right to receive payment? The legal system has developed a rule to help resolve that issue: Generally speaking, once a carrier has assigned its right to receive payment to a factoring company, the factor has to notify all paying customers of this assignment. Once the customers have received notice, then the customer must pay only the factor, and not the carrier. (This rule is found in a body of law called the Uniform Commercial Code, and is the law throughout the U.S.

UCC Financing Statements

The Uniform Commercial Code has other things to say about factoring relationships, in addition to the notice requirement mentioned above. One such important area covers the relationship of the factoring company to other parties the carrier might owe money to. In order to make sure that the factoring company has a right to collect payment before any other creditor, it must take a “security interest” in the invoices. Part of the “security interest” process includes filing a UCC Financing Statement with a government office. By doing so, the factoring company announces to every other creditor that it owns the right to payment on the carrier’s invoices. Though this is not legally required for factoring relationships, it is a “best practice.”