Factoring to emerge as key ingredient of FSC

DUBAI - The global shift in traditional trade finance methods to global Financial Supply Chain (FSC) based on open source account terms has seen factoring emerging as a key trade finance source across the world and the trend is catching up in the Middle East, according experts in global factoring business.

By Babu Das Augustine

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Published: Sat 24 Apr 2004, 12:13 PM

Last updated: Wed 1 Apr 2015, 11:52 PM

"Factoring has been traditionally seen as a trade financing method for efficiently managing the working capital. But in the context of changing relationships between buyers and suppliers it has become an efficient instrument of global sourcing," said Peter Mulroy, Group Vice President, Sun Trust Bank in Dubai at conference on Factoring organised by HSBC Factoring Services and Factors Chain International.

In addition to providing up to 80 per cent financing on invoices to the suppliers, it also provides adequate credit period to buyers. It works effectively as working capital injection to the suppliers on time. Typically, factoring is method by which collections are executed skilfully, while the relationships with clients are managed professionally.

Factoring brings simplicity and transparency in trade transactions both in the case of international trade and domestic trade. As the Factoring companies are well established banks or financial institutions, the chances of suspicious transactions are almost nil.

"In all transactions, the banks representing both the supplier and the buyer know their clients. The failure rate or disputes in transactions are minimum because the buyer can inspect the merchandise and the documentation prior to the authorisation of payment," he said.

In the context of international trade, factoring is a product between pure open account risk and the traditional Letters of Credit (LCs). While the LCs are laden with a number of reconciliation issues because of the different banking laws and practices across the globe, factoring seeks to make trade financing a straight payment option between two contracting parties. "Letters of credit is a dying instrument. In search of efficiencies in global supply changing management, buyers are seeking to source from least cost sources with optimal cashflow benefits while seeking greater speed in tradeflow in terms of movement to goods and documents," said Rengin Ekmekcoglu, CEO of Yapi Kredi and the president of Turkish Factoring Association.

As a global financial supply chain solution, Factoring optimises the fragmented financing solutions for global procurement and sourcing. With increasing focus of Middle East companies to source from least cost countries, factoring is set to emerge a key trade financing solution.

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