1 所 属 领 域 : 资 产 证 券 化 Category: Asset securitization 发 表 语 言 : 英 文 In English 保 理 在 中 国 情 境 下 的 融 资 作 用 The financing role of factoring in China context Shuzhen Chen 1 School of Management, University of Science & Technology of China Liang Liang 2 School of Management, University of Science & Technology of China 摘 要 通 过 对 保 理 相 关 文 献 的 综 述 和 保 理 在 中 国 的 发 展 分 析, 本 文 介 绍 了 一 项 特 殊 的 保 理 技 术 ( 应 收 账 款 债 权 交 易 ) 以 解 决 中 国 中 小 企 业 的 融 资 问 题 这 项 技 术 在 解 决 中 国 普 遍 存 在 的 三 角 债 问 题 上 尤 其 有 优 势, 但 相 关 的 定 价 机 制 风 险 评 估 和 防 范 体 系 仍 有 待 进 一 步 研 究 Abstract By reviewing relevant literatures about factoring and development of factoring in China, this paper presents a specific factoring technology (account receivable right trading) that aims to solve financing problems faced by small and medium enterprises in China. This technology is especially advantageous as a solution to the chain-debt problem which is prevalent in China context. Going forward, there is a great need to develop a pricing mechanism, an appraisal system, and a set of precautions for this transaction. 关 键 字 : 保 理 融 资 问 题 发 展 中 国 家 中 小 企 业 应 收 账 款 债 权 交 易 Key words: Factoring; Financing problem; Developing countries; Small and medium enterprises(smes);account receivable right trading(arrt) JEL Classification: G28, G32, E42 1 Shuzhen Chen: Postgraduate at School of Management, University of Science & Technology of China, Hefei, Anhui, China, Tel: address: 2 Liang Liang: Professor at School of Management, University of Science & Technology of China, Hefei, Anhui, China, Tel: address:
2 The financing role of factoring in China context Factoring is generally viewed as an account receivable management policy that subcontracts multiple facets of the credit-administration process to a single outside intermediary (Mian and Smith (1992)). Among these administrative functions, its financing role has received most attention due to the prominent advantage in solving financing problem which is a main barrier to firm s growth. This advantageous solution is especially attractive to SMEs in developing countries for it does not rely on information about the borrower, but rather on the obligor (Beck and Demirguc-Kunt (2006)). However, as factoring keeps developing steadily in China, the financing problem faced by SMEs has not yet been mitigated. This paper will provide a brief analysis about this failure of factoring to overcome financing constraints in China, and present a remodeled factoring technology to better settle SMEs financing problem in China. The paper is organized as follows. Section 1 reviews related literatures. Section 2 analyzes the development of factoring in China, and section 3 gives a presentation about the remodeled factoring technology that aims to solve financing problems faced by SMEs in China. Section 4 concludes. Ⅰ Related literature Related papers can be classified under two topics that either analyze factoring decision in a general context or particularly investigate issues of factoring in
3 developing countries. On the first topic, Sopranzetti (1998) models factoring decision in a way that seller (the creditor of the receivables) has no incentive to monitor the credit quality of receivables and its customer s (the debtor of the receivables) behavior once its entire receivables are sold to factors. In particular, seller s monitoring level falls to zero after factoring in the model since it no longer bears any credit risk. However, the factor would rationally reflect this behavior of the seller s in the offering price. And it turns out that sellers with a high probability of bankruptcy will not factor their lowest quality receivables because the equilibrium price offered by the factor for these receivables will be too low to motivate the sellers to sell. Therefore, Sopranzetti questions the proposition by Smith and Schnucker (1994) based on moral hazard problem, and argues that the motivation behind firms factoring decision is not managing credit risk since the firms are only able to factor their highest quality receivables. However, Dias (2001) points out a paradox in Sopranzetti s paper based on the extension of Sopranzetti s model, and presents an alternative explanation that receivables have a lower rate of default because they have been factored without recourse. This argument is consistent with that in Smith and Schnucker (1994), suggesting that factoring is used to manage credit risk by firms. Based on factoring s functional responsibilities proposed by Mian and Smith, Summers and Wilson (2000) investigate the financing motive for the use of factoring. According to an empirical study, the paper shows that factoring is more likely to be
4 used when firm s producing goods have a collateral value, and product demand is stable. There are also other determinants such as firm s demographic characteristics whose influence on the use of factoring has been analyzed by Soufani. Soufani (2000) points out that factoring is not available for all firms to overcome financing constraints unless the firm fits the specific profile identified in his study. Particularly, smaller and younger firms in manufacturing and associated industries are more likely to access factoring, and factoring services tend to be found in limited companies rather than partnerships or sole proprietorships (Soufani (2001)). Though the factoring decision is generally influenced by parameters such as firm s size, type of product, industry, sector, age, type of customers, financial statement, management team, operational suitability, profitability, collectability, and credit notes, factoring companies appear to have different criteria to select their clients compared with banks and may provide a source of financing for small and young firms operating in specific sectors (Soufani (2002)). While the papers related to the first topic address the motivation of factoring decision and investigate factoring s financing role by testing the influence of firm s specific characteristics on factoring decision, the second topic consists of several papers that explore the role of factoring as financing technology in developing countries. The first paper is written by Papadimitriou, Phillips, and Wray (1994), proposing community-based factor for developing countries based on the analysis of
5 its specialization in comparison with that of megafactor and niche factor. And Klapper (2006) suggests reverse factoring as an advantageous factoring type for developing countries, which is further analyzed by Alferink (2010). While these articles explore the appropriate forms of factoring business for developing countries in terms of either factor s type or factoring type, the remaining papers analyze the factoring business in particular developing countries or areas. Bakker, Klapper and Udell (2004) address factoring s advantages in solving financing problems based on the case of Eastern Europe where the financing problem greatly constrains the growth of SMEs (Klapper, Sarria-Allende and Sulla (2002)). The factoring market in Romania has been investigated by Ioana (2006) and Vasilescu (2010) based on the analysis of factoring s evolution, unique features and relative advantages. While Ioana mainly remarks the development of Romania s factoring market based on the analysis of factoring market worldwide (Ioana and Rodica (2006)), Vasilescu emphasizes the financing advantage of factoring due to its unique feature that it is primarily based on the credit quality of receivables rather than that of the risky SMEs. Ⅱ Development of factoring in China The previous section has highlighted the financing advantage of factoring which may be used to mitigate financing problems faced by SMEs in China. This section presents the development of factoring in China to explore relevant issues regarding
6 this solution to the financing problem. The analysis of factoring evolution in China is based upon data from Factors Chain International (FCI), implying a trend for both structure development and scale expansion of factoring in China. As showed in Figure 1, factoring in China keeps growing steadily in volume from 2004 with a jump in Actually, factoring in China kept increasing as fast as at the top ten growth rate worldwide from 2006, with 2010 witnessing an amazing leap of factoring volume to approximately 130% just behind the increase in Mexico and Peru. This fast growth directly brings a huge expansion of factoring volume, making China one of the leading factoring markets worldwide. 180, , , , ,000 80,000 60,000 40,000 20, Figure 1 Factoring volume over 7 years in China (in millions of Euros) Table 1 provides a brief presentation about volume of factoring operations in China compared with some selected countries. United Kingdom keeps dominating the factoring market worldwide, with France replacing the second place of Italy from As it shows, China s share of factoring operations has been rising constantly in Asia as well as in total world. It was ranked as the eighth largest share worldwide just behind that of the listed countries in 2009, and surpassed even the France s in 2010,
7 rising to the second largest share worldwide. TableⅠ Volume of factoring operations in China compared with selected countries (in millions of Euros) France 81,600 89, , , , , ,252 Germany 45,000 55,110 72,000 89, ,000 96, ,536 Italy 121, , , , , , ,745 Spain 45,376 55,515 66,772 83, , , ,909 United Kingdom 184, , , , , , ,243 United States 81,860 94,160 96,000 97, ,000 88,500 95,000 China 4,315 5,830 14,300 32,976 55,000 67, ,550 Japan 72,535 77,220 74,530 77, ,500 83,700 98,500 Total Asia 111, , , , , , ,602 China s Share in Asia (%) Total World 859,588 1,015,798 1,133,423 1,300,666 1,283,559 1,283,559 1,648,229 China s Share in World (%) Moreover, Figure 2 presents the factoring structure in China compared with selected countries. Domestic factoring is the main type in China as well as in other developed factoring markets such as United Kingdom, which suggests a reasonable structure of factoring. International factoring in China is larger than that in other countries, which may contribute to the development of factoring market in China by
8 introducing developed financial technology and standard financial operation from abroad. 250, , , ,000 50,000 0 France Germany Italy Spain United Kingdom United States China Japan Domestic International Total Figure 2 Factoring structure in 2010 (in millions of Euros) Though factoring industry in China grows significantly, the financing barrier faced by SMEs has still not been removed because the factoring companies are almost bank-owned, with high-credit large companies being their main clients (Li and Wei (2006)). Therefore, it is necessary to explore a specific factoring technology that can effectively address the financing problem constantly faced by SMEs in China. Ⅲ Account receivable right trading This section presents a specific factoring technology which aims to solve financing problem under the particular context of China. Though SMEs in China face a severe challenge of financing, they have not took full advantage of account receivable to finance their production cycle. On the contrary, the large amount of total accounts receivable may aggravate the financing problem in the following example. As showed in Figure 3, Firm 4 has an urgent need of cash, but is not able to access the amount due to its limited financing ability. And the firm also has a right of
9 equivalent account receivable owed by firm 3 who may claim equal amount from firm 2. However, firm 2 may fail to pay the amount if its debtor (firm 1) can not afford the debt. Therefore, the chain debt has derived triple amount of account receivable, and quadrupled the financing need originated from firm 4. Whoever fails to finance its account payment in the chain, the financing problem is aggravated since the subsequent creditor firms are not able to access finance through their accounts receivable. Chain Debt Firm 1 Firm 2 Firm 3 Firm 4 Having an item of account receivable owed by Firm 1, and purchasing goods or service worth100 millions fromfirm 3 on credit. Having an item of account receivable owed by Firm 3, and being in urgent need of cash worth 100 millions. Purchasing goods or service worth 100 millions from firm 2 on credit. Having an item of account receivable owed by Firm 2, and purchasing goods or service worth100 millions fromfirm 4 on credit. Figure 3 The aggravation of financing problem due to chain debt Ordinary factoring has not been an efficient solution to this problem which is prevalent in China. First, there are few financial institutions providing the factoring service in China. Factors in China are mainly banks that favor trading with creditworthy large companies. Therefore, SMEs can not access the ordinary factoring to finance their production cycle, which will further expand the chain debt. Second, the ordinary factoring requires good credit information of account receivable, and its development is greatly impeded by the incomplete credit information bureau in China.
10 Third, the ordinary factoring generally involves sale of account receivable in cash. This cash trading method makes the factoring service more difficult to progress if there is a cash limitation in economic policy. The ARRT is a specific factoring technology that aims to overcome these barriers and to solve the chain-debt problem in China context. In this case, the right of account receivable is transferred by a trading certificate rather than in cash, and the trading is based on not only the credit quality of account receivable but also the value of collateral. Particularly, Figure 4 shows the trading process based on the aforementioned example. There are three stages in the whole process including issue of right certificate, transfer of right certificate, and repurchase of right certificate. In issuing stage, the creditor (firm 2 in the example) of a certain account receivable applies for ARRT certificate from the management company who presides over the ARRT. The management company will accept or reject the application after assessing both the credit quality of account receivable and the value of collateral provided by the debtor (firm 1) of the account receivable. And at the following stage of transfer, firm 2 can directly use the right certificate to pay its supplier (firm 3) who can again pay other firms by this certificate. Therefore, the chain debt can be curtailed to only one obligatory relationship between the applier (firm 2) and the holder by transferring the right certificate. Assuming that the right certificate is held by firm 5 eventually, it then can claim payment from firm 2 who is responsible for the repurchase of right
11 certificate. And if firm 2 fails to reimburse the amount due, the management company can settle the obligation by selling off the collateral provided by firm 1. Transfer of right certificate Management Company Firm 2 Firm 3 Firm 4 Firm 5 Collateral Firm 1 Issue of right certificate Repurchase of right certificate Figure 4 The process of ARRT ARRT may be particularly beneficial for SMEs in China for a number of reasons. First, as previously discussed, the traditional factoring is mainly based upon receivable s credit quality which is difficult to assess due to incomplete credit information system in China. And ARRT has an additional guarantee of collateral, which makes SMEs more credible in the transaction and breaks down traditional factoring s confinement to creditworthy large companies. Second, ARRT is conducted on basis of right certificate which is free from cash limitation and can mitigate the chain-debt problem effectively. Moreover, the right certificate can also be used to apply for bank loan as collateral or sold to other institutions to satisfy cash requirement. Another advantage of ARRT is that the management company mainly focuses on solving financing problems faced by SMEs, which may greatly protect the development of SMEs from competition with large companies. And the management company can also build a credit history on SMEs in ARRT, which may lead to
12 additional lending to SMEs and help develop relationships with SMEs. Though ARRT is argued to be advantageous for SMEs in China context, there are still several relevant problems deserving attention. At a micro-level, it should be identified what kind of organizations are involved in ARRT, and how they share the benefits and risks in the transaction. On the pricing side, a reasonable equilibrium price of ARRT should be determined for reference in practical transaction considering each party s profits and responsibilities. On the risk management side, more researches should focus on analyzing each party s behavior such as adverse selection and moral hazard in order to keep the transaction proceeding smoothly and safely. Moreover, there is a necessity to develop a mechanism to help identify fraud problems such as bogus receivables and nonexistent customers. At the macro-level, it should be considered more broadly as the accumulative risks of chain debt is far from bearing by the economy. Therefore, it is of great importance to promote a sound precaution system to prevent fictitious trading and vicious competition and to guarantee the security of the ARRT system. Ⅳ Conclusions It is concluded from the review of relevant literatures that the financing role of factoring is especially prominent for SMEs and can effectively overcome their financing constraints. However, the extensive development of factoring in China has not mitigated SMEs financing distress because financing problem in China has some
13 particularities that the ordinary factoring is no longer an effective solution. ARRT is a specific factoring technology presented to solve this particular financing problem faced by SMEs in China. And this technology is especially advantageous as a solution to the chain-debt problem which is prevalent in China context. Further research may focus on pricing mechanism of ARRT and appraisal and precaution system for managing related risk. References Alferink, H. A., Buyer initiated non-recourse factoring of confirmed payables: a major global corporation case study (Technische Universiteit Eindhoven, Eindhoven). Bakker, M. H. R., Klapper, L., and Udell, G. F., Financing small and medium-size enterprises with factoring: global growth in factoring and its potential in Eastern Europe, Policy research working paper series 3342, The World Bank. Beck, T., and Demirguc-Kunt, A., Small and medium-size enterprises: Access to finance as a growth constraint. Journal of Banking & Finance 30(11), Dias, C. J. B., Factoring in Brazil: an information asymmetry approach (University of Illinois at Urbana-Champaign). Ioana, D., Remarks regarding the development of factoring in Romania, Working paper, International Multidisciplinary Symposium Universitaria Simpro. Ioana, D., and Rodica, G., The dynamics of factoring markets, Working paper, International Multidisciplinary Symposium Universitaria Simpro. Klapper, L., The role of factoring for financing small and medium enterprises. Journal of Banking & Finance 30(11), Klapper, L., Sarria-Allende, V., and Sulla, V., Small- and medium-size enterprise financing in Eastern Europe. Policy research working paper series 2933, The World Bank. Li, L. and Wei, G., The Study of International Factoring Business in the Process of Financing at the Front End of Supply Chain. The International Conference on Greater China supply chain and logistics. Mian, S. L., and Smith, C. W., Accounts receivable management policy: Theory and evidence. Journal of Finance 47(1), Papadimitriou, D. B., Phillips, R. J., and Wray L. R., An alternative in small business finance: Community-based factoring companies and small business lending. Working paper 108, Jerome Levy Economics Institute, Bard College.
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