Factoring is a faster and more cash flow beneficial alternative to letters of credit (L/Cs) according to speakers at a recent gathering of factors in Dubai.

Moreover, they argue that the trade financing method that has proved popular for domestic transactions in some territories for some time is a particularly efficient instrument for global sourcing.

Risks

Speakers at a recent conference on factoring in Dubai organised by HSBC Factoring Services and Factors Chain International proposed that in the context of international trade risks, factoring is positioned between pure open account trading and L/C transactions.

Typically, they argued that while L/Cs are associated with a number of reconciliation issues because of the different banking laws and practices across the globe, factoring offers a straight payment option between two contracting parties.

Benefits

"Letters of credit are a dying instrument," according to chief executive officer of Yapi Kredi and the president of Turkish Factoring Association, Rengin Ekmekcoglu.

"In search of efficiencies in global supply chain management, buyers are seeking to source from least cost sources with optimal cash flow benefits while seeking greater speed in trade flow in terms of movement to goods and documents," he added.

Global sourcing

Factors see particular opportunities in what they describe as the shift in international trade financing towards open account terms.

"Factoring has been traditionally seen as a trade financing method for efficiently managing working capital. But in the context of changing relationships between buyers and suppliers it has become an efficient instrument of global sourcing," according to Group Vice President, Sun Trust Bank in Dubai, Peter Mulroy.

Factoring is structured to provide an adequate credit period for the buyer and by providing up to 80 per cent financing on invoices, the supplier enjoys the benefits, at a cost, of outsourcing collection processes and obtaining of prompt payment, thus freeing up working capital.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.