Factoring can help businesses get payment of their invoices within short time cutting the overall cost of doing business, maximising profit and simplifying international transactions.
Experts said this at a webinar styled 'International Factoring as a Tool for Receivables Management and Financing' on Tuesday.
The Factors Chain International (FCI) and the Bangladesh Institute of Bank Management (BIBM) co-hosted the event.
The experts, however, cited challenges in popularising factoring, a type of debtor finance, including shortfall of learned professionals, unawareness of businesses, absence of the culture of accepting new instruments.
The FCI is the global representative body for factoring and financing of open account domestic and international trade receivables.
FCI secretary general Peter Mulroy, FCI regional manager of South and South East Asia Thompson Lui, BIBM director general Md Akhtaruzzaman, Association of Bankers, Bangladesh chairman Ali Reza lftekhar, Bangladesh Bank deputy governor Ahmed Jamal and BIBM director Prof Prashanta Kumar Banerjee spoke online.
Factoring is a financial transaction in which a business sells its accounts receivable (say invoice) to a third party (called a factor) at a discount, according to Investopedia, a website providing investment and finance education.
Addressing the event, Mr Murloy said, "International factoring is a $600-billion market which is popular in the European Union and North American countries than the South and South Asian region."
Taking factoring services can assist companies in making faster growth by saving time, getting swift payments for invoices, reducing financial management cost and attracting clients from advanced economies.
Giving an example, the FCI secretary general said India has passed the Factoring Regulation Act in 2012.
Since then, its factoring market volume has grown by double digit every year and its economy ballooned.
Bangladeshi companies, especially apparel exporters, can be greatly benefitted from services like factoring while financial institutions with good track records can also help those companies thrive further.
Highlighting factoring risks, Mr Murloy said, "Fraud is the biggest killer of any companies doing factoring. When a company buys receivables, there are contract risk, dilution risk, default risk, etc."
"But the point is a service provider can manage risks looking into the company's dilution history and getting support from an import factor to negotiate with the buyer about dilution issue."
About how Bangladesh can get acquainted with factoring, Mr Murloy suggested the interested banks and other financial institutions to follow the FCI guideline to get educated about the product.
Encouraging the financial service providers, he said, "Instruments like factoring won't go away any soon, even factoring companies have seen huge spike in the number of factoring during the pandemic."
Better and quality services overcome the barriers of testing times, Mr Murloy added.
On challenges towards popularising factoring here, Dr Banerjee said lack of capacity building in both supply and demand side, unawareness among businesses and financial service providers, and scarcity of learned professionals are some key challenges.
Sometimes foreign buyers do not come to Bangladesh because of the absence of factoring which reduces complexity in international transactions, he observed.
It takes time for local firms to get payments against their invoices through traditional means like letters of credit or documentary collection, Mr Banerjee said.
The country's businesses and financial institutions should push for introducing services like factoring to increase the country's trade growth and attracting more buyers into the country, he added.
Mr Lui suggested Bangladeshi banks and other financial institutions invest in education on factoring as FCI will provide its platform for networking with global factoring companies.
He said factoring is very common in certain industries, especially in the clothing industry, where long receivables are part of the business cycle.
The FCI can help Bangladeshi companies get membership and connect with relevant global leaders, Mr Lui added.
On June 30, the Bangladesh Bank issued a circular allowing the 'factoring' mechanism in Bangladesh.
The service can help companies improve their short-term cash needs by selling receivables in return for an injection of cash from the factoring companies.
Factoring companies would give a business up to 80 per cent of its invoice value within a short time.
When a debtor pays the value of invoice, the factoring company will give back 20 per cent less any fees.
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