Financing Small and Medium-size Enterprises with Factoring: Global Growth in Factoring - and its Potential in Eastern Europe

This paper explores the advantages of factoring over other types of lending for firms in developing economies, and discusses the informational, legal, tax and regulatory barriers to its growth. It also examines the role of factoring in the eight Eastern European countries that became European Union (EU) members on May 1, 2004.

The paper discusses the following with regard to factoring:

• Distinguishing features, origins and mechanics;
• Role in the international financial landscape, including how it compares with other lending products for Small and Medium Enterprises (SMEs).

The paper states that factoring:

• Is a form of asset-based finance where the credit extended is based on the value of the borrower's accounts receivable - the payments owed by the borrower's customers;
• Generally includes two other services: credit and collections. This bundling of services is one of its advantages over other types of lending, particularly for SMEs that do not have the expertise or resources to manage their credit and collection activities;
• Can play an important role in financial systems with weak commercial laws, contract enforcement and bankruptcy systems.

The document concludes that factoring offers key advantages over other lending products and is likely to become more important in these countries, and suggests policies to accelerate its development.