The potential of factoring for improving SME access to finance

The inability of many firms (usually of small and medium size) to secure sufficient working capital to finance regular business cycles often forces them to use their long-term assets (through divestment or collateralization) to bridge the financing gap created between outgoing payments and collections of accounts receivable, with potentially negative effects on business prospects and development since long-term assets are depleted to finance short-term liabilities. Factoring, as a financial service based on the sale of accounts receivable (short-term assets) is a very useful financing tool for efficient (and when done without recourse) off balance sheet access to working capital. The industry has been known for many years in developed economies and has been gaining momentum recently in developing and transition countries. Part of the efforts should be concentrated on the creation of a solid legislative basis for assigning accounts receivable and the introduction of a sound regulatory regime. This chapter presents the legal and regulatory aspects of factoring transactions and analyses different approaches from the perspective of supporting the development of factoring services.