Factoring concept gaining popularity

DS-Concept Factoring, a German trade financing company with offices all across the globe, introduced the third party business idea-factoring-in Bangladesh in 2008, witnessing the growing trend among the exporters getting deferred payments.
Factoring is a financial transaction in which a business job sells its account receivables or invoices to a third party (Called factor). In advance factoring, the third party provides financing to the seller of the accounts in the form of cash. Factoring is not a loan. It is the purchase of a financial asset.
"Business prospects are good for us, as exporters here are receiving more and more deferred payments from the importers," said Mr. Alexander Pinkas, Chief Executive Officer of DS-Concept Factoring (DSCF) liaison office in Bangladesh.
Pinkas said, when importers from the US, Europe or other countries ask for deferred payments to exporters out of Bangladesh, DSCF can buy the deferred L/C's and change it to sight L/C's, thus giving the exporters relief.
A sight LC means that payment is made immediately to the beneficiary/ seller/ exporter upon presentation of the correct documents in the required time frame.
"This is where export factoring comes in. Factoring provides a 'full service' package and the client hands over the collection of all of its payments to us," he said, explaining factoring.
If there are no deferred payments, importers often take 3-6 months to get the return of investments, as shipment and transportation and customs clearance taken already about 4 weeks and final payment of ultimate buyer is made normally after 30 days or even longer on open account.
"Here, we have a solution too. We can pay the exporter his money against the receivables, "he added.
The export factoring product is designed to help businesses export their goods and services with the comfort of a trusted financial partner, helping them evaluate credit and eliminate the wait to be paid.
The concept is gaining popularity in Bangladesh as a means of financing as compared to traditional modes of funding through the banks. Here, access to funds is quicker as well as cheaper, and does not require any security and collateral whatsoever.
"Our core business is buying the receivables of exporters," said Mr. Pinkas, but before doing so, DSCF has to be sure about the financial strength of the importers.
"We make credit worthiness checks over the financial standing of importers through Euler Hermes, one of the largest back-up insurance companies in the world. When the result is positive, we open an LC on behalf of the importer only with an advance payment of 20-25 percent and come up with funds and buy receivables of deferred payments," said the DSCF CEO.
This benefits the importer as well as its own credit line is not blocked for the full amount of the purchase volume and makes the importer more flexible in trading, he added.
In today's business world, the issue is getting momentum as the US and Europe, the two biggest consumer in the world, are facing some sort of financial crisis and buyers there have been asking for more and more deferred payments, for up to 180 days.
"Only big companies (Exporters) can handle such situations (Deferred payments)," said Mr. Pinkas. Small business often lack the knowledge, language skills and administrative skills to chase up payments efficiently from buyer in Europe or the US, he pointed out.
He said a lot of Bangladeshi exporters and buying houses, especially small and medium companies, are now contacting DSCF following a surge in deferred payments.
Besides readymade garment exporters, the German trade financing company is also working with bicycles, jute and shrimps.
"We ensure 100 percent payment to exporters in in case of importer's bankruptcy," said Mr. Pinkas.
Interesting aspect of the business is faster services and no collateral, said Pinkas. "Money could be disbursed in seven days only."
However, larger or more experienced exporting businesses often do not need the level of support that full service factoring provides. Nor, in particular, do they want a third party service provider playing a direct role in the relationships they have developed with their foreign customers.