Factoring is a centuries old form of financing and there is good reason why it has persevered and is gaining renewed popularity today. It is a complete financial package that combines working capital financing, credit risk protection, accounts receivable book keeping and collection services. Factoring is offered within an agreement between the factor and a seller. Under the agreement, the factor purchases the seller's accounts receivable, normally without recourse, and assumes the responsibility for the debtor's financial ability to pay.
The current crisis has brought about more awareness about factoring and the product’s ability to finance domestic and international trade while mitigating risks. Specialist banks and factoring houses are taking advantage of this increased interest in factoring and promote the importance of this alternative financial solution and its advantages for both domestic and export-oriented businesses. Many businesses are starting to factor their invoices to pay bills, take advantage of early payment discounts, increase sales, and last but not least, to fund their business’ growth. Prior to the crisis, factoring services, particularly in Europe, tended to be more focused on the finance aspect. The reality is that more customers are now viewing factoring from a different perspective. They see the service as offering a potential means of managing risks and providing cash management solutions, over and above the funding aspect. This trend is growing, particularly for exports from emerging markets to the more developed ones.
In a world where sophisticated computer technology allows orders abroad to be placed within seconds, the various international customs, currency systems, laws and languages are still creating barriers to trade. Many importers are insisting that trade be conducted on open account terms and exporters satisfying such requests are encountering substantial risks as well as cash flow problems. These are the reasons why factoring is becoming the fastest growing trade finance product. In this increasingly open account trade environment, there is strong evidence that world trade requires factoring to support exports as well as domestic trade, to manage risks and create working capital.
International factoring is typically undertaken under what is so-called the Two-Factor system. The role of two collaborating factors in this scenario is to work together to effectively offer a total service to the counterparties. With this unique Factor-to-Factor collaboration importers are approached in their own country by the Import Factor in their own language and in the locally accepted manner. As a result, the distances, as well as the cultural differences, cease to be a problem. International factoring lets exporters safely offer their foreign customers competitive open account terms and still have 100% protection against the importer’s inability to pay. International factoring is proving to be an excellent alternative to other forms of trade finance because it allows funds to be generated when required, so that business opportunities are not lost.
It is, however, very important to note that the factoring products are excellent for domestic trade too and indeed domestic factoring represents still today a major part of the global factoring market. When considering a base for your international factoring operations, Malta ticks all the right boxes. Its central Mediterranean location and millennial trade links have made the island an established regional commercial hub. Malta’s geographical position also means that it lies within a convenient time-zone (CET) and in close proximity to growing factoring markets in Africa and the Middle East.
Helped by a robust legal and regulatory framework, Malta vaunts a respected tradition in banking as well as the highest international standards in the various professional services, not least legal and accounting. On the back of a state-of-the-art telecommunications and technological infrastructure the Maltese government also offers incentives for the establishment of back-office, call-centre and operations activities with most, if not all, existing set-ups functioning within a regime of certified ISO quality standards. Moreover, factoring activities are recognized locally and regulated under the Financial Institutions Act.
Perhaps the consideration which most would tip the balance in favour of Malta as a base for international factoring operations is the island’s highly-educated English-speaking workforce, flexible, skilled and diligent, and which is available at a relatively moderate cost. However, the icing on the cake, according to many of the thousands of expats on the island, is the enviable reputation Malta enjoys for a lifestyle which seamlessly balances work and relaxation, doubtless boosted by a near-perfect climate and the myriad leisure options this allows its residents to pursue.
Featured by Finance Malta, the public-private organization responsible for the promotion of Malta’s International Financial Centre, website: http://www.financemalta.org