The Determinants of Global Factoring

Factoring services can be traced historically to Roman times. Closer to our own era, factors arose in England as early as the thirteenth century, as commissioned merchants for manufactures in distant, unfamiliar markets. These factors relieved manufacturers of selling and credit collection responsibilities and specialized in assessing the market's risk and collecting monies due. While demand for these services continues to contribute to the growth of factoring, the effective delivery of these services by individual firms is no longer the sole reason for the expansion of the industry. Examination of factoring as a worldwide phenomenon leads to the conclusion that a conducive and responsive legal environment may be of even greater importance to the growth of factoring at the beginning of the twenty-first century. Today, total worldwide factoring volume is over $450 billion, an increase over the past 5 years of over 90%. One reason for the growth in factoring is that as global competition grows, businesses are less apt to demand payment at the date of or within a short time of delivery. Rather, firms are offering their customers increasingly attractive trade credit conditions, such as interest-free account payables at longer maturities. As a result, firms have a greater volume of account receivables to use for financing. Many factoring companies provide businesses with complete financial packages that combine: financing, administration (collection), risk bearing (credit protection), and cash management expertise. Demand for these services has increased as a greater number of good, " credit-worthy " customers turn to factoring to avoid the expense and burdensome paperwork associated with letters of credit and for the ability to purchase goods on open account terms. For many businesses one of the most appealing benefits of factoring is the ability to enter overseas markets which would otherwise pose too great a credit risk. Businesses may employ a factor's international expertise to offset the large geographic costs associated with international sales, such as their familiarities with foreign markets. When the dispersion of buyers is international, factors may provide additional services (though at a higher cost to the seller) like overseas collection and performing a credit analysis across legal requirements and languages. In addition, a factoring company may pay for trade account receivables in local currency and will burden (and discount) both the credit and the currency risk of the account receivables purchased.