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The role of factoring for financing small and medium enterprises

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  • Klapper, Leora

Abstract

Around the world, factoring is a growing source of external financing for corporations and small and medium-size enterprises (SMEs). What is unique about factoring is that the credit provided by a lender is explicitly linked to the value of a supplier's accounts receivable and not the supplier's overall creditworthiness. Therefore, factoring allows high-risk suppliers to transfer their credit risk to their high-quality buyers. Factoring may be particularly useful in countries with weak judicial enforcement and imperfect records of upholding seniority claims because receivables are sold, rather than collateralized, and factored receivables are not part of the estate of a bankrupt SME. Empirical tests find that factoring is larger in countries with greater economic development and growth and developed credit information bureaus. In addition, the author finds that creditor rights are not related to factoring. The author also discusses reverse factoring, which is a technology that can mitigate the problem of borrowers'informational opacity in business environments with weak information infrastructures if only receivables from high-quality buyers are factored. She illustrates the case of the Nafin reverse factoring program in Mexico and highlights how the use of electronic channels and a supportive legal and regulatory environment can cut costs and provide greater SME services in emerging markets.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 30 (2006)
Issue (Month): 11 (November)
Pages: 3111-3130

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Handle: RePEc:eee:jbfina:v:30:y:2006:i:11:p:3111-3130

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References

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  1. Raymond Fisman & Inessa Love, 2003. "Trade Credit, Financial Intermediary Development, and Industry Growth," Journal of Finance, American Finance Association, vol. 58(1), pages 353-374, 02.
  2. Van Horen, Neeltje, 2004. "Trade Credit as a Competitiveness Tool;Evidence from Developing Countries," MPRA Paper 2792, University Library of Munich, Germany, revised Mar 2005.
  3. Glaessner, Thomas & Kellermann, Tom & McNevin, Valerie, 2002. "Electronic security - risk mitigation in financial transactions : public policy issues," Policy Research Working Paper Series 2870, The World Bank.
  4. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Legal Determinants of External Finance," Working Paper 19443, Harvard University OpenScholar.
  5. Sopranzetti, Ben J., 1998. "The economics of factoring accounts receivable," Journal of Economics and Business, Elsevier, vol. 50(4), pages 339-359, July.
  6. McMillan, John & Woodruff, Christopher, 1998. "Inter-Firm Relationships and Informal Credit in Vietnam," CEPR Discussion Papers 2036, C.E.P.R. Discussion Papers.
  7. Glaesnner, Thomas G. & Kantur, Zeynep, 2004. "Two case studies on electronic distribution of government securities: the U.S. Treasury Direct System and the Philippine Expanded Small Investors Program," Policy Research Working Paper Series 3372, The World Bank.
  8. Inessa Love & Nataliya Mylenko, 2003. "Credit reporting and financing constraints," Policy Research Working Paper Series 3142, The World Bank.
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  10. Raymond Fisman & Mayank Raturi, 2004. "Does Competition Encourage Credit Provision? Evidence from African Trade Credit Relationships," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 345-352, February.
  11. Simeon Djankov & Caralee McLiesh & Andrei Shleifer, 2005. "Private Credit in 129 Countries," NBER Working Papers 11078, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Didier, Tatiana & Schmukler, Sergio L., 2013. "Financial development in Latin America and the Caribbean : stylized facts and the road ahead," Policy Research Working Paper Series 6582, The World Bank.
  2. Santos, Gisler Andre & Sheng, Hsia Hua & Bortoluzzo, Adriana, 2012. "The Use of Trade Credit by Firms: Evidence for Latin America," Insper Working Papers wpe_277, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  3. Hirofumi Uchida & Gregory F. Udell & Nobuyoshi Yamori, 2006. "SME financing and the choice of lending technology," Discussion papers 06025, Research Institute of Economy, Trade and Industry (RIETI).
  4. Demirguc-Kunt, Asli, 2006. "Finance and economic development : policy choices for developing countries," Policy Research Working Paper Series 3955, The World Bank.
  5. de la Torre, Augusto & Gozzi, Juan Carlos & Schmukler, Sergio L., 2006. "Financial development in Latin America : big emerging issues, limited policy answers," Policy Research Working Paper Series 3963, The World Bank.
  6. Beck, Thorsten & Demirguc-Kunt, Asli, 2006. "Small and medium-size enterprises: Access to finance as a growth constraint," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2931-2943, November.
  7. Morgan, Horatio M., 2013. "Foreign banks and the export performance of emerging market firms: Evidence from India," Research in International Business and Finance, Elsevier, vol. 29(C), pages 52-60.
  8. World Bank, 2010. "Bhutan Investment Climate Assessment Report : Vitalizing the Private Sector, Creating Jobs, Volume 1. Summary Report," World Bank Other Operational Studies 12871, The World Bank.
  9. Dong Xiang & Andrew C. Worthington & Helen Higgs, 2011. "Firm-level determinants and impacts of finance-seeking behaviour and outcomes for small and medium-sized enterprises (SMEs) in Australia," Discussion Papers in Finance finance:201115, Griffith University, Department of Accounting, Finance and Economics.
  10. Stephanou, Constantinos & Rodriguez, Camila, 2008. "Bank financing to small and medium-sized enterprises (SMEs) in Colombia," Policy Research Working Paper Series 4481, The World Bank.
  11. World Bank, 2006. "Mauritius : From Preferences to Global Competitiveness, Report of the Aid for Trade Mission," World Bank Other Operational Studies 8171, The World Bank.
  12. World Bank, 2007. "Costa Rica : Investment Climate Assessment," World Bank Other Operational Studies 7691, The World Bank.
  13. World Bank, 2010. "Scaling-Up SME Access to Financial Services," World Bank Other Operational Studies 12515, The World Bank.
  14. Berger, Allen N. & Udell, Gregory F., 2006. "A more complete conceptual framework for SME finance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2945-2966, November.
  15. Wuttke, David A. & Blome, Constantin & Henke, Michael, 2013. "Focusing the financial flow of supply chains: An empirical investigation of financial supply chain management," International Journal of Production Economics, Elsevier, vol. 145(2), pages 773-789.
  16. World Bank, 2007. "Colombia : Bank Financing to Small- and Medium-Sized Enterprises (SMEs) in Colombia," World Bank Other Operational Studies 7654, The World Bank.
  17. Ivanovic, Sasa & Baresa, Suzana & Sinisa, Bogdan, 2011. "Factoring: Alternative Model Of Financing," UTMS Journal of Economics, University of Tourism and Management, Skopje, Macedonia, vol. 2(2), pages 189-206.
  18. World Bank, 2010. "Bhutan Investment Climate Assessment Report : Vitalizing the Private Sector, Creating Jobs, Volume 2," World Bank Other Operational Studies 12872, The World Bank.
  19. Berger, Allen N. & Udell, Gregory F., 2005. "A more complete conceptual framework for financing of small and medium enterprises," Policy Research Working Paper Series 3795, The World Bank.

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