Factoring option loan for SME


The Philippines is one of the countries in developing Asia where factoring and receivables finance is expected to take a stronger hold with the passage of the Personal Property Security Act (PPSA), according to a factoring executive.

Lee Kheng Leong, Asia chapter director of FCI, a Netherlands-headquartered global factoring network and association claiming close to 400 members in 90 countries, predicts the emergence of factoring and receivables finance and other alternative forms of funding in the Philippines with the recent enactment of PPSA.

The new law, Republic Act (RA) 11057, was signed by President Rodrigo Duterte on 17 August.

RA 11057 expands the list of assets acceptable to banks and other financial institutions as collateral and expected to allow small and medium-scale enterprises (SME), as well as farmers and fisherfolk, greater access to credit.

Under this law, acceptable movable assets that can be used as loan collaterals include personal property other than land or real estate, such as farming equipment and machines used in business operation, crops or produce, warehouse inventory and receipts, intangibles (i.e. intellectual property) and accounts receivable.

Lee, during a recent presentation in Manila said accounts receivables are used in factoring and receivables finance, a financing method in which an enterprise sells its accounts receivable at a discount to a third-party funding source to raise capital.

An account receivable is the amount of money owed by a customer to a business entity for goods or services delivered or used on credit but not yet paid for by the client.

Lee explained how factoring works: The entrepreneur sells to the factor (third-party funding source, such as FCI) its accounts receivable, and the factor in turn pays the enterprise the value of the sales invoice, minus commission and other charges. The factor will then be the one to follow up and secure the payment from the client for the goods or services that have delivered by the enterprise.

Lee said that with factoring, the SME is assured of immediate payment of its accounts receivable, giving it the capital needed to continue production, pay wages, and buy materials and equipment, while the factor takes on the task of getting the payment from the client and the risk of potential non-payment.

SME have long encountered difficulties in getting bank loans as they are often considered to be high risk, lacking traditional collateral like real estate and having a strong possibility of failure. With factoring, they have an alternative way to acquire capital and stay competitive, said Lee.

He added that in Asia-Pacific, China’s factoring volume has grown significantly, while factoring demand continues to increase in Hong Kong, Singapore and Taiwan.

Good growth is also seen in developing nations such as India, Malaysia, Thailand, Vietnam and the Philippines.

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