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For sure, he should have read his contract more closely
By Steven Hausman, CEO, Advance Business Capital
“Columbus factored his voyages.”
The diligent student of factoring blogs (yes, there are others besides this one) comes across this statement from time to time. It’s inspiring. It’s interesting. It’s certainly a lot more fun than a recital of factoring’s role in American cotton farming in the 19th Century, which is what you more commonly find searching out factoring’s roots.
An Inconvenient Untruth
The only problem is that’s not true. There’s a vague similarity between the contract Columbus had with the Spanish monarchs and factoring. King Ferdinand and Queen Isabella “advanced” Columbus three ships and some letters of credit to buy supplies and hire crew in exchange for 90% of the profits from his voyage to “the Indies” (India) and “Cipangu” (Japan).
Money now for future income. That’s the basic concept of factoring, but our present-day factoring system is much more rigidly bound by commercial law. By comparison, Columbus’ contract with the Crown was as vague as an I.O.U.
Why then is it claimed he did? Understand, not everyone makes that claim. The way the internet works, someone who once wrote a blog for a factoring company probably recklessly made that statement on a day when he/she was desperate for content (hard to believe, but it can happen). No one disputed it, probably because no one read it (factor bloggers are so starved for readers that we count eyeballs individually).
Eventually, someone apparently did read the claim, likely another factor blogger looking for content. The claim was carelessly repeated it and before long it had taken on the life of an urban legend.
The Allure of Myth
We sympathize with the initial impulse. Factoring is regarded with a certain suspicion here in the U.S. (less so in Europe, where it’s more common). Compared to bank lending, it’s riskier (for the factoring company) and more expensive (for the trucker). Conditions like that inevitably draw some shady operators. The bad apples taint everyone else.
So it’s natural that factors want to assert their respectability and long history. And it is true that factoring goes way back. It’s included in the Code of Hammurabi (1750 B.C.), which was one of the first attempts to lay out commercial and civil law.
And the desire to improve on the truth is just human nature. The notion that Columbus factored has a powerful appeal. It gives truckers a kind of economic kinship with the “Admiral of the Ocean Seas,” that most visionary of entrepreneurial gamblers. And it gives factoring, which like dry cleaning is an essential but glamourless business, the sheen of borrowed royalty. So far as we know, no factor has included “since 1492” in its advertising, but the century is still young.
Humble factoring blogger that we are, we admit we’d like to embrace this image ourselves. It’s flattering to both parties and elevates a mere financial contract into something that resonates with historical import. It even elevates factoring bloggers from journeymen explicators into historical detectives, finding nuggets of golden anecdote from the dross of the past.
The Truth
King Ferdinand and Queen Isabella of Spain did finance Columbus’ journey, but only in part. They contributed 1.14 million of the 2 million maravedis that the voyage would cost. (The main part of their contribution was the three ships, which the Crown had recently seized from debtors.) The rest of the voyage was financed by Florentine investors that Columbus had lined up on his own.
As we said, there is a similarity to factoring and the financing behind Columbus, but it’s very general and it is only this: Columbus’s backers were betting his audacious journey would produce future income in the form of trade goods (or at least a route to trade goods for future trips). That is very far from the strict guidelines of factoring as practiced today.
Big Differences
The differences are too numerous to detail, but the basic one is that Columbus’s backers had no guarantee they would see any return on investment. In fact, the contract signed by the Spanish monarchs was heavily weighted in Columbus’ favor. Not only did he receive a tenth of all income from the voyage but also a tenth of all income from future voyages, whether by himself or others. (The terms of Columbus’s contract with the private investors are unknown, since there is no extant copy.)
Income in perpetuity is an irresistible clause, but it’s also unenforceable. The fact that it was proposed and accepted reflects Columbus’s unworldly side and the Crown’s cynicism. Spain was willing to accept such conditions because previous expeditions to “the Indies” had not returned. The likelihood was that this one would be no different. What did the Crown have to lose besides three leaky ships and some spare change?
Columbus the “Failure”
Except Columbus did return, much to everyone’s astonishment. Moreover he’d made contact. He even brought back some India men, who didn’t look a bit like the polished traders that overland travelers had bartered with, but still they were evidence he’d gone somewhere.
Unfortunately for Columbus, his voyage produced little wealth. Nor did his three next voyages. It was the voyagers who came after—Cortez, Pizarro and all the other ruthless conquistadors—who robbed the Aztecs and Incas of their gold and turned native tribes into slave labor.
Columbus, as he should have anticipated, received not a single maravedi of this. He died in penury, nearly forgotten. Only a generation later, when Spain had suddenly become the wealthiest kingdom in Europe, was his significance acknowledged and he achieved the kind of fame that eludes even the richest of men. Five hundred years from now, no one will have heard of Warren Buffet but schoolchildren will still be writing papers on Columbus.
Columbus Should Have Factored
We don’t know what Columbus would have thought of his deal if he could have foreseen the outcome. He might have been willing to trade part of his fame for a better ROI. One thing is certain, if Columbus had factored, he would have come out much better.
For many truckers factoring is a good deal, but of course not always. Review and apply this course and you’ll learn how to tell good deals from bad, and how to make factoring work for you. Class dismissed.
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