Factoring is a trending global trend. The worldwide factoring volume now exceeds EUR 1.299 billion a year — a remarkable figure for an industry which for some forty years, operated almost solely in the United States. Since the 1960s, the industry has grown phenomenally, stretching to over 64 countries around the globe. (Reference: Factors Chain International website)
More and more businesses are currently using factoring to settle trade transactions with some more than ten million customers worldwide. All these companies are reaping the benefits of factoring i.e. consistent cash flow, lower administration costs, reduced credit risks, more time for core activities. These advantages are especially important for the small and medium-sized businesses.
This flexible method of managing trade debts enables companies to obtain cash for their domestic and international accounts receivables by selling them to a ‘factor’. The receivables, normally owed on short and open terms, can be sold on either a recourse or non-recourse basis. The factors provide professional assistance with regard to credit control, collection and sales accounting.
There are now more than 1,000 factoring companies many of which offer international or cross-border factoring services as well as domestic. Most are separately incorporated companies, often owned by well-known international banks and other major financial or industrial organizations.
Factoring in Malaysia
Factoring was first introduced in the early eighties and has had an encouraging growth. Today the size of the industry is reckoned to worth close to RM50 billion. The reason behind the growth of the industry can be best summarized and explained by two reasons.
Firstly, factoring’s flexibility and effectiveness as a financing instrument is increasingly accepted by the Malaysian business community at large and is seen as an alternative to traditional banking facilities. Secondly, the continued growth of the Malaysian economy has added boost to the industry with the creation of more business opportunities, particularly for the SMEs, which factoring is tailored for in the first place.
It must be appreciated and further emphasized that factoring is a simple financing tool which can be applied as long as there is a creation of unencumbered debt. Factoring has increasingly seen in this country as an alternative source of financing as well as an improved means of working capital management. A factoring facility can strategically assist growing companies, particularly the SMEs in expanding their business. However, such businesses are more often than not, either thinly capitalized or are normally weakly backed by fixed assets. As such, traditional bankers would normally fight shy of or are only willing to extend limited working capital facilities to these businesses.
Factoring companies on the other hand have been able to provide SMEs easier access to working capital facilities and playing the role of progressive financiers, have been able to move into and fill in the vacuum left by traditional bankers.
The difference between Factoring and Islamic Factoring
Both operate on the same fundamentals, but Islamic Factoring has the potential to foster greater financial intermediation and inclusion, especially among Muslim populations. The Shariah law allows trade with those from other religions; as such the necessary regulatory, supervisory and consumer protection frameworks need to be adopted to address the unique risks in Islamic finance, and that financial solutions and products offered are Shariah-compliant.
In Malaysia, debt security instruments developed on the principal of ‘Bai al-Dayn’ (which conforms with Shariah law) are regulated by Bank Negara Malaysia and the Securities Commission to safeguard the rights of all parties involved in the contract.