# **Factoring From A Global Perspective**

In addition, commercial information providers (sometimes called mercantile credit exchanges) such as Dun and Bradstreet (D&B) provide credit reports that they generate typically from payment performance information submitted by vendors. D&B is the world’s largest private business credit registry, with a database of 64 million records, 13 million of which are in the United States.

The information produced by business credit bureaus can be quite valuable in making credit decisions. In particular, failure prediction models that include mercantile credit information produced by business credit bureaus have power in predicting firm failure beyond financial ratios and descriptive information about the firm (Kallberg and Udell 2003b).<sup>21</sup> Moreover, the existence of third party information exchanges can affect credit availability and macroeconomic performance. A recent World Bank survey indicates that without credit bureaus the time to process loans, the cost of making loans, and the level of defaults would all be higher (Miller 2003). Another study found that countries with more intense, established formal information sharing—either through credit registries or voluntary information exchanges—exhibit greater bank lending relative to GNP (Jappelli and Pagano 2001). That survey also found that credit risk is negatively correlated with measures of formal information sharing.

There has not been any empirical analysis of the impact of credit bureaus on factoring. Studies have found a strong relationship between higher credit information sharing and more bank lending and less credit rationing (Jappelli and Pagano 2001; Love and Mylenko 2003). And it seems likely that credit bureau information would benefit all credit products. But the degree of its importance may differ among lending technologies. For instance, credit bureau information is necessary for business credit scoring. Consumer credit bureau information is particularly important here because in microenterprise lending where credit scoring has been applied, the creditworthiness of the entrepreneur—as opposed to the business itself—tends to dominate (Cornett and Saunders 1999). In terms of relationship lending, credit bureau information may be crucial in the early stages of the bank- borrower relationship, when the borrower’s reputation is still being formed.

But the importance of information exchanges to asset-based finance—asset-based lending and factoring—is less clear. On the one hand, such lenders primarily base their credit decisions on the value of a firm’s collateral, not the firm itself, so business credit information about their borrowers may be of only secondary importance. On the other hand, business credit bureau information about the obligors on their receivables could be quite valuable.

However, an offsetting effect might be that factors and asset- based lenders develop their own databases on account payment performance (that is, on obligors’ accounts). This could make information from business credit bureaus less valuable for institutions that offer asset-based finance— particularly in countries where factoring is a dominant lending technology and factors are large. Large factors in these countries may enjoy significant economies of scale because of the size of their proprietary databases on account payment information. Indeed, some of these large factors may have better databases than the business credit bureaus operating in their markets. This superiority could come from wider database coverage or from higher reliability if private and public credit bureaus suffer from relatively greater organizational inefficiencies (i.e., agency problems).

Table 2A contains information from a recent international study of public credit registries and private credit bureaus. The second column indicates whether a country has a public credit bureau (business or consumer) and the third whether a country has a private bureau (business or consumer). A “1” indicates the presence of such an institution; a “0” indicates the absence. Most developed countries have private credit bureaus—for example, Canada, the United Kingdom, and the United

> 21 For detailed global analysis of public and private credit bureaus, see Miller (2003). For detailed analysis of information collection by a private credit bureau, see Kallberg and Udell (2003a).

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**THE WORLD BANK**