Factoring is a financing technique that traces its roots back to the ancient Mesopotamian civilization in the form of trade finance, where merchants received loans to carry out commercial transactions. However, the modern concept of factoring emerged in the early 17th century in England, where merchants used to sell their goods to wealthy individuals, known as factors, at a discount in exchange for immediate cash. The factors would then resell the goods in the market and earn a profit.
During the industrial revolution, factoring gained more popularity, as businesses needed to maintain a steady cash flow to meet their expenses. However, the concept of factoring as a business model emerged only in the early 20th century in the United States. Factors started to specialize in financing trade receivables, which provided a new source of working capital to businesses.
In India, the concept of factoring emerged in the 1990s when the government allowed non-banking financial companies (NBFCs) to undertake factoring activities. In 2011, the Reserve Bank of India (RBI) issued guidelines for banks to undertake factoring activities as well, thereby promoting the growth of the factoring industry in the country.