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New tool for SME funding suggested

'Factoring' to help overcome working capital crunch: BB governor

Star Business Report
As arranging short-term finance remains a matter of concern for small and medium enterprises (SMEs), the central bank yesterday suggested introduction of 'factoring', a financial tool of advanced payment of funds against the clients'invoices.
The idea is that financial institutions which will provide the service will buy the invoices at an agreed discounted rate that will enable the companies to use the fund instead of seeking short-term bank loans generally known to be expensive.
The new credit guarantee system will help SMEs overcome shortage of working capital as they can get it without any collateral, Bangladesh Bank (BB) Governor Fakhruddin Ahmed told the inaugural session of a two-day international symposium on "Factoring"
organised by SouthAsia Enterprise Development Facility (SEDF) in Dhaka.
"We should not wait for perfection. The more we apply the system, the more we'll learn about the system towards perfection. We need legal framework for allowing international factoring but there is no barrier to introducing domestic factoring," he said.
Under the system, a manufacturer or service provider will get up to 80 percent of the work orders receivables from the 'factoring' company, which will act as an intermediary between seller (manufacturer) and buyer.
The same company will handle the transactions, right from manufacturing of the products to supply of them to buyers within a certain time frame.
The BB governor said factoring system is a very popular funding
instrument in developed countries and it can be a source of working capital for SMEs in Bangladesh and also real estate companies, which always need liquidity.
Addressing the function, Jeroen Kohnstamm, secretary general of Factors Chain International, a global body of factoring companies, said the system can increase cash flow to the manufacturing and service providing companies, increase their efficiency and bring in profitability in their business.
He said international factoring quickens export-import business as trade takes place in open account with no need for opening letter of credit. "It allows companies to focus on production, marketing and sales rather than credit risk, collection and financing."
Anis AKhan, CEO and managing director of IDLC of Bangladesh Ltd, which was first in Bangladesh to
launch domestic factoring in 1998, said there is potential for factoring here but it cannot take off due to lack ofcredit rating of companies.
"International factoring can benefit the apparel exporters who are yet to take recourse to factoring. It will make apparel export more competitive," he said.
Khan further said if all the companies are rated and the central bank stores the rating information, it will encourage more financial institutions to introduce factoring.
Anil Sinha, general manger of SEDF, Anne Marchal, charge d'affaires of EU Delegation in Bangladesh, and Iyad Malas, regional director of International Finance Corporation (I FC), private sector lending arm of the World Bank, also spoke.