At present some overseas companies are offering some sorts of financial services of 'PrimaDollar' type to Bangladesh exporters, which is a blend of factoring and Invoice discounting for exporters. They are also offering security of collection of payment from overseas buyers. Bangladesh should enact law of Factoring as early as possible to promote real Factoring service for local and international trade finance and repatriation of export proceeds.

1. https://today.thefinancialexpress.com.bd/views-reviews/factoring-an-important-business-to-business-
tool-1566307368
Factoring - an important business-to-business tool
M S Siddiqui | August 21, 2019 00:00:00
The financial transaction or the arrangement through which a company sells
its invoiced debts to a third party, at discount in exchange for immediate
cash to finance continued business, is called Factoring. Factoring may be for
domestic, export or import trade financing contracts.
Some researchers observed the sixteenth century as the period during which
this contract was born in Great Britain. Because of the then slow
communications and transportation for the sale of products to another
territory, it was necessary to assign an agent in that territory, and charge him
or her with the duty of finding purchasers to sell and ship goods on behalf of
the principal. It appears to be closely related to early merchant banking
activities evolved in the course of centuries to the present status.
A 'Factor' is called a specialised company, who buys a debt, which belongs
to someone else, with a reduction in price, in order to gain a profit from his
collection. The term "Factor" in English refers to a person who performs a
service for another person under compensation, while the term 'factoring'
characterises the sales system of financing. Many countries have law for
factoring and the criteria of formation of factor are well specified. A Factor
that provides factoring services shall hold the appropriate licence, which
certifies the skills to conduct such an activity in accordance with the
requirements of the law.
The factoring contract is a consensual contract under compensation to which
the participating parties are the factor, the supplier, and the debtor. The
receivable is essentially a financial asset associated with the debtor's liability
to pay money owed to the seller. The seller then sells one or more of its
invoices (the receivables) at discount to the third party, the specialised
financial organisation (the factor), to obtain cash. The sale of the receivables
essentially transfers their ownership to the factor, indicating that the factor
obtains all of the rights and risks associated with the receivables.
Accordingly, the factor obtains the right to receive the payments made by the
debtor for the invoice amount, and must bear the loss if the debtor does not
pay the invoice amount.

2. The supplier transfers debt / receivables to the Factor, free of any liens,
dispute, objection, claim or any other right of third parties. Factor acts
against a fee, which can be a fixed amount and / or an interest rate, for a
period of time determined through an agreement between the parties. The
factor's overall profit is the difference between the price it has paid for the
invoice and the money received from the debtor, excluding the amount lost
due to non-payment.
At the initial stage, the Factor took physical possession of goods, provided
cash advances to producers, financed credits extended to buyers, and
insured the credit strength of buyers. Nowadays, the factoring's rationale still
includes the financial task of advancing funds to sellers who sell to credit
worthy organisations. It is now not required to take physical possession of
the goods sold. The legal mechanism and conventions transfer the ownership
through international trade instruments.
Another important task of Factoring is trader finance. Factoring is a financial
alternative for the management of income, namely, a transformation of the
credit price in cash. The financial institute, called the factor, buys the
accounts of the income of a commercial company familiar with the term
customer, and pays immediately up to 95 per cent of the amount agreed
upon. The factoring company, which realises the factoring, pays the
remaining amount to the client when the customer pays the debit against the
supplier.
The collection of debts from the customer can be conducted by the factor
himself, or by the client, in compliance with the type of the factoring contract.
Moreover, factoring contract is a contract under compensation, where
compensation is paid for the service of the management of loans, as well as
a guarantee against the risk of insolvency of the debtor. Therefore factoring
may be of two types: without warranty, where the supplier does not
guarantee the factor about the debtor's solvency capacities, and factoring
with warranty, where the supplier completely guarantees the factor about the
payment of the credit of the customer's account from the debtor. In the case
of factoring without warranty, however, the supplier shall remain liable and
obliged to the factor, if the debtor fails to pay completely the credit of the
customer's account, for any reason other than solvency.
Factoring is the sale and purchase of outstanding 'debts'. It is a method by
means of which a business can raise money to increase the monetary
situation of credit period or standard credit period of any particular trade
practice. It facilitates the expansion of business activities, finance its
expansion and continued development. Unlike any credit culture of
Bangladesh, factoring doesn't need any collateral for loan or financing.

3. Bangladesh does not have any law for factoring but Bangladesh Bank drafted
a policy and circulated for opinion of stakeholders early this year. However,
only policy without law cannot support factoring in real term.
At present some overseas companies are offering some sorts of financial
services of 'PrimaDollar' type to Bangladesh exporters, which is a blend of
factoring and Invoice discounting for exporters. Agrani Bank and Fast
Security Islami Bank signed MoU with PrimaDollar to promote the export
finance product without mortgage. They are also offering security of
collection of payment from overseas buyers. Bangladesh should enact law of
Factoring as early as possible to promote real Factoring service for local and
international trade finance and repatriation of export proceeds.
M S Siddiqui is a Legal Economist.
mssiddiqui2035@gmail.com