Factoring: An Alternative to LCs in Apparel Industry

Factoring Finance in Apparel Sector: Guarantee of Secure Cash Flow and Business Growth
Tanvir Hossain
Reporter of Textile Tribune
Shahid Aziz Hall
Bangladesh University of Textiles
Email: tanviranikbutex@gmail.com

It’s a short term, non-bank financing of accounts receivable. It’s a financial transaction in which a business sells its account receivable, example-invoices; to a third party commonly known as “FACTOR” at a discount and the factor buys the right to collect the money from the customers on behalf of the seller.

There are three parties directly involved, the factor, the person who sells the receivable and the debtor which has the liability to pay the seller. The sale of the receivable transfers the ownership of the receivable to the factor, delivering all the rights associated with the receivables.
The main policy of a factoring company is that the company will purchase the invoice and advance the seller money within 24 hours. The advance ranges from 80-95% of the value of invoice depending on the industry, the customer’s credit histories and other criteria. The factor collects money from the customers and pays the rest of the money to the seller minus a fee generally ranging from 2-6% assuming the collection risk.

Flow Chart of Factoring

Seller provides service to the customers

Seller sends the invoice to the factor

The seller receives cash on advance on the invoice of the seller from the factor

Factor collects full payment from the customer

Factor pays rest of the money minus a fee to the seller

Factoring in apparel sector: 
Factoring in apparel sector can ensure secure and fast cash flow in textile business. Business transaction in Apparel as well as textile sector is done by L/Cs which are becoming less popular as days are passing due to the complex terms and procedures. Factoring in this regard can eradicate the problem of cash flow as the business gets instant payment from the factor rather waiting for several months. And the company can expand business and the cash flow is secure. Factoring has already been frequently used in Apparel sector in INDIA,CHINA,VIETNAM,UK,USA and other countries. Its hig time to introduce Factoring in Bangladeshi Apparel sector for fast and secure business transactions.

Advantages over bank loan or L/Cs: 
Factoring is not like a bank provided loan and it does not create a liability on the balance sheet. Sometimes it’s considered as one of the most expensive form of financing but, it’s not always true. Yes, considering the rate of discount of factors against interest rate of bank loan, factoring costs more. But when someone does not qualify for a loan it doesn’t matter what rate is. Further bank does not provide service like factor does.

L/Cs have been using by the manufacturing and merchandising companies for quite some time but, factoring is also not a new concept. It’s been used since sixteen century in different forms. It’s time to introduce the concept of factoring in our country and many factoring companies are opening branches in Bangladesh.

In case of L/C there is time limit and the business has to open new L/C for different companies which is time consuming and costly. Importers have to provide sufficient security and required margin to confirm L/Cs from the bank and sometimes growing requirement for L/C margin goes beyond the financial ability of the importer.

Different non L/C mechanisms of trade payment like open account trade payment and documentary collection and factoring are being used progressively.

Worldwide scenario of factoring: 
In 2013 the total amount of international factoring in nearly 70 countries stood euro 357.23 billion and the amount of total factoring accounted for 2.23 trillion euro at the same time.

Factoring in Bangladesh: 
Though factoring is very popular in foreign countries, it’s yet to be introduced in Bangladesh. International chamber of commerce in association with Factors Chain International (FCI), Asian Development Bank (ADB) and Bangladesh Institute of Bank Management (BIBM) had organized a seminar recently at Westin Dhaka to reintroduce factoring in Bangladesh.

Some non-banking financial institutions like IDLC, Lanka Bangla, Prima Dollar and other companies have launched domestic factoring in Bangladesh.

Factoring is done so that the business can receive cash more quickly than waiting 30-60 days for a customer’s payment. International factoring is necessary for better and smooth trade finance and it is time to review cross-border factoring issue by focusing on cost-benefit and legal issues.

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Mazharul Islam Kiron is a textile consultant and researcher on online business promotion. He is working with one European textile machinery company as a country agent. He is also a contributor of Wikipedia.

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