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The first method of finance that led to the emergence of the cash flow industry was owner financing.

In an owner-financed sale, a real estate seller accepts a promissory note as a portion of the purchase price. The note is then secured by placing a mortgage on the real estate being sold.  Homeowners and commercial real estate investors in this country have used owner financing as a method of buying property since the early 1900’s.  However, it wasn’t until much later that it became popular.

During the high interest rate periods of the Seventies and Eighties, home buyers found it difficult to obtain affordable financing from banks. Interest rates and inflation had skyrocketed to double digits, making it almost impossible for people to sell their real estate. If a real estate seller was willing to take a down payment from the buyer and hold a mortgage note for the remaining balance, the transaction was much more feasible for the buyer–and certainly more convenient.

By the time inflation drifted back down, thousands of individuals were holding private mortgage notes. Individual investors and investment companies recognized a tremendous profit opportunity in those notes, and they began to buy them directly from sellers.

These privately held mortgage notes have turned into a commonplace investment nationwide. Today, privately held mortgage notes are even securitized and traded on Wall Street.

The second method of finance that impacted the development of the industry is factoring, also called the sale of a business’ accounts receivables.

Factoring has a long, rich tradition dating back some 4,000 years to Mesopotamia (which some think of as the cradle of civilization).  In addition to many other things, the Mesopotamians first developed writing, put structure into business code and government regulation, and came up with the idea of factoring.  Mesopotamia and its citizens eventually became extinct but the concept of factoring definitely did not.  Indeed, almost every civilization which valued commerce has practiced some form of factoring, including the Romans.

The first documented use of factoring occurred in the American colonies before the revolution. With the advent of the Industrial Revolution, factoring became more focused on the issue of credit, although the basic premise remained the same. By assisting clients in determining the creditworthiness of their customers and setting credit limits, factors could actually guarantee payment for approved customers.

Prior to the 1930’s, factoring in this country occurred primarily in the textile and garment industries, as the industries were direct descendants of the colonial economy that used factoring so specifically. After the war years, factors saw the potential to bring factoring to other forms of invoice-based businesses and the expansion began.

Today, factors exist in all shapes and sizes: as divisions of large financial institutions or, in larger numbers, as individually owned and operated entreprenurial endeavors.

Many of these private factors sprung up in record numbers as interest rates rose to new heights in the 60’s and 70’s. This trend intensified in the 80’s, primarily due to the increasing impact of interest rates and changes in the banking industry. With banks becoming too expensive and too inflexible due to heavy regulation, the small businessperson was forced to find other sources of financing for expansion and growth. As more and more banks stopped being a funding source for the small businessperson, factoring has increasingly become an option used by the small business owner.

This year alone thousands of businesses will sell billions of dollars in accounts receivable, and they are doing it for profit, growth, and survival.

Prior to the 1980’s, factoring was used primarily in the garment, textile and furniture industries and was only otherwise available to “big business”. So, with the banking industry upheaval of the 80’s and the rise of the independent broker network in the 90’s factoring of accounts receivable has taken its place as an acknowledged financial tool that can assist many businesses - both large and small.

Clearly, the concept of selling an income stream has been a part of the financial services industry for “many” years. However, until the last decade, cash flow transactions were essentially limited to private mortgages and invoices.

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