FACTORING IN SINGAPORESonam Jambhulkar874National Law University

FactoringFactoring is an alternative form of financing it helps in protection against losses on receivables. Factoring is a financial transaction in which a business sells its accounts receivable. Factoring is a financial transaction in which a business sells its receivables to a third party, called the factor. Accounts receivable are a legally enforceable claim for payment to a business by its customer/ clients for goods supplied and/or services rendered in execution of the customers orderIt involves the factor buying outstanding invoices/claims/receivables from the factoring client (usually a company/enterprise) on an ongoing basis.

A pre-defined percentage is kept with the factor, as security deposit. i.e. invoices to a third party, called a factor, at a discount. The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights associated with the receivables.The Factor checks the ongoing creditworthiness of the customer and takes under an agreed limit, the full risk of default, before signing the contract.

In factoring a company sells its receivables from deliveries of goods and services to its customers continuously to a factoring institution And hence the company maintains immediate liquidity directly from his debts. And with this liquidity obtained by factoring company may also procure-use income in purchasing because of different discounts and special rates.By way of factoring the company outsources its claims and management provides administrative relief. The sale of receivables reduces the balance and leads to better balance sheet ratios.

Factoring in SingaporeThe factoring market of Singapore shows stable growth due to a positive business climate, a rising acceptance of factoring and a still high market potential.The factoring market in Singapore has diversified client and debtor industries, and provide different forms of factoring which can be offered.Factoring services are provided according to the individual needs and wishes of the clients, such as amount to be financed, the maturity and collection period, the risk mitigation, the transfer of the debt management and, other services offered by the factoring company.

Most of the factoring customers include trade and commission trade, metal processing, food, beverage, manufacturing of machined products, engineering, manufacturing, production of chemical products, transport equipment, electronics / electronic devices and paper, publishing and printing .Also wide range of the middle class of Singapore has potential to use factoring as an alternative and attractive form of business financing. And it is visible that through the years passing by many middle classes have preferred to finance through factoring.

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0.5

0.75

2.6

3.8

Increase of middle class population for using factoring for financing

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Increase of middle class population for using factoring for financing

20000.5

20040.75

20082.6

20123.8

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Eligibility for factoring servicesSingapore registered entityCompany must be in operation for the last 2 yearsTrades domestically on credit terms

Factoring InstitutionsDBS BANK LTD-EB-FACTORINGGE Commercial Financing (Singapore) LtdGlobal Merchant Funding Pvt LtdHong Leong Finance LimitedHSBC RECEIVABLE FINANCEIFS Capital LimitedMalayan Banking BerhadOCBC LtdSTANDARD CHARTERED BANK: Standard chartered banks in Singapore has acquired all the SMEs in 2010UNITED OVERSEAS BANK LIMITED

Factoring scenario in SingaporePresently the factoring industry in Singapore is very successful.People are preferring to raise their finances through factoring and different institutions are emerging to provide factoring services. Hence factoring is very much in demand. The number of factoring clients has shown growth in the market in last few decades. There has been almost 20% growth of clients in factoring market. Factoring in Singapore has finally been established and embedded itself as an instrument to finance means of production and safeguard against risks.

According to different factoring Association in Singapore, factoring adds to almost 4.87% of financial market.

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0.8

1.4

2.2

1.2

4.89

Volume of Factoring Market of Singapore

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Volume of Factoring Market of SingaporeSeries 2Series 3

19900.82.42

19951.44.42

20002.21.83

20051.22.85

20104.89

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Growth in Factoring MarketDue to recession in last few years the market has suffered a lot. The banks were skeptical about providing factoring services to companies and individuals.The market was already down and if further the services would have been provided then the banks had threat of suffering lots of losses, due to downfall in the financial market in all over the world.Many countries were facing the same problem due to recesson which had great impact on countrys economy.

Growth in Factoring market

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Growth Rate

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Growth RateSeries 2Series 3

19901.32.42

19952.24.42

20003.11.83

20054.42.85

2010-1.5

20123

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Factoring is prevalent, often (but not always) on a recourse basis, and can be for the purpose ofproviding working capital, credit protection or collection and management of receivables.With 80% of global trade done on an open account basis in Singapore, factoring delivers benefits to exporters who wish to reduce counterparty risk. Exporters are able to offer more competitive terms such as longer payment periods and extended credit, without exposing themselves to the risk of payment defaults.

With factoring, the payment risk is transferred to the factor (or the bank) when exporters sell their invoices to them. The factor then collects the invoices on the exporters behalf. Corporations ranging from MNCs to SMEs use factoring as a core part of their working capital strategy and to manage more efficient supply chains.According to FCI, total factoring volume in Asia increased by over 219% from 2004 to 2010. The key markets of factoring in Singapore ahs registering growth of 200% and respectively, over the same period.Hence the forecast can be made that the present rate of GDP can increase to 7% in next few decades due to increase in factoring market of singapore.

Problems in Factoring Market in SingaporeCompanies do not prefer using factoring services when they do not run any debt collection operations of their own. Companies do not prefer using factoring services when they wish to finance their expansion and growth on their own. Companies do not prefer using factoring services when they want to protect themselves against losses on receivables.Companies do not prefer using factoring services when they think that there is no need of such financial source and they can rain money from other resources.Many people are still apprehensive about the loss or ay other suffering that can be caused to them. Some factoring companies create a strong financial base but do not get the potential customers.