February 3, 2006
Reverse factoring on the rise
The trend for reverse factoring of receivables is on the rise.
A new report finds that reverse factoring was becoming common place in areas where lenders find credit information difficult to obtain. As a result, reverse factoring only purchases receivables from high credit risks, reports the website creditman.
Under the terms of reverse factoring, the credit risk is equal to the risk of the low risk customer, and not the risky SME.
This allows creditors in developing countries to factor without recourse and provide low risk loans to high-risk SMEs.
Emerging markets, such as Albania and Macedonia, have proved to be popular testing grounds for the product where, according to Leora Klapper of the World Bank, conventional factoring services have not been profitable.
She said that in such areas factor firms take a huge credit risk if they cannot obtain historical credit information. Reverse factoring defaults the risk to that of a high-quality borrower - leaving the factor needing only to collect information from a small selection of buyers.
The product can also avoid considerable problems with fraud which dominate emerging markets, bypassing barriers such as weak legal systems and paper based credit bureaus and business registries.
Currently reverse factoring is becoming popular across southeast Europe, south and central Latin America. Research found that the number of reversed factored receivables grew by 30 per cent over the last two years.
Factoring: 