With the demand of textiles exploding across Europe and America, there needed to be a way to supply it. Thus, factors looked like this:
- Factors would take the goods
- Factors would hold onto the goods until they found a buyer
- Factors would deliver the good to the buyer
- Factors would take payment for the goods
- Factors would return the payment to the manufacturer sans a commission rate
As the factors prospered, they began extending credit to the merchants without taking possession of the physical goods. The factor would reimburse himself from the sale of the goods. The factor could place a lien on the seller's goods or retain them if the seller refused to pay.
As the economy evolved, so too did factoring. No longer was there a need for the storage, marketing, and distribution of the physical goods because the goods were sold directly to the buyers instead, bypassing the factors. However, the sellers still needed upfront financing in order to produce the goods to sell. This was where factors saw the opportunity and seized it. Thus, now the seller assigned to the factors the collection of receivables from the sales. This is a classic example of businesses evolving as the economic climate changes, which is what any good business does in order to stay in business (Apple is the classic example of evolving from computers to other electronics, such as iPods and iPhones).
Minor tweaks in the rules have been made since this type of factoring became widespread in Europe in the 1950s. One was the invention of recourse and non-recourse factoring in order to protect the factors from vendor invoices who never paid. With the rise in foreign trade transactions in the last few decades, factoring has seen amazing growth and is now considered a great way to improve cash flow and increase working capital for many businesses.