Regulators in Bangladesh are looking to incorporate factoring* as a financing option to help expedite the country’s import/export activities and to provide a means for its manufacturers and exporters to avoid problems associated with deferred payments from buyers.
Though factoring, instead of securing a loan, business owners sell accounts receivable (invoices) at a discount to a third-party funding source to raise capital. The source, or factor, then advances most of the invoiced amount to the company immediately and the balance upon receipt of funds from the invoiced party.
During a roundtable presentation last week on “Factoring: A Better Alternative to Letter of Credit,” jointly organized by the Dhaka Chamber of Commerce and Industry and Bangladesh Institute of Bank Management, participants suggested Bangladesh bring the country into accordance with international practices and start factoring on a limited scale. They also urged Bangladesh Bank to ease letter-of-credit rules to expedite the country’s export-import business, according to an article in The Independent.
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About 90 percent of the country’s business community consists of small and midsize enterprises on which the growth of country’s economy is largely dependent, Prashanta Kumar Banerjee, director of Bangladesh Institute of Bank Management, said during a separate keynote presentation at the event. Lack of working capital or a large cash-conversion cycle are common problems for such organizations, he said in The Independent article, suggesting factoring could help them obtain needed capital.
*Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A Business will sometimes Factor its Receivable Assets to meet its present and immediate Cash needs.