**Factoring From A Global Perspective**

The example of Italy and the United States suggests a more general pattern where lenders adopt the lending products that work best in their credit environments. This implies that the importance of factoring might vary across countries in a systematic way, in line with key aspects of the credit environment. This section explores that possibility by examining some of the factors that drive differences in the importance of factoring across countries.

# **Information infrastructure**

A financial system’s information infrastructure may play a critical role in determining the level of available credit, the mix of available lending products, and the importance of factoring in that mix (Box 2). One key aspect of this infrastructure is information about payment performance. This information may be critical because a firm’s record of paying its past obligations may be the best indicator of its ability to pay its future ones.

Third party information exchanges are the most important source of such information. On the consumer side of lending this means consumer credit bureaus. On the commercial side it means public or private business credit bureaus. Credit bureaus address one of the main impediments to credit availability: asymmetric information. If the information divide between borrowers and lenders is too wide, credit rationing may result (Jaffee and Russell 1976; Stiglitz and Weiss 1981).

# **Box 2. The Role of Reverse Factoring**

In some developing countries with weak information infrastructure, factors use a different approach to offer their services. In ordinary factoring the factor (lender) generally purchases many accounts receivable from a limited number of sellers. But this approach requires the factor to collect credit information and calculate the credit risk for a large number of customers. In the alternative, known as reverse factoring, the lender pools and purchases receivables payable by only a few high-quality and/or international customers from many suppliers. Thus the lender only needs to collect credit information and calculate the credit risk for a few large, transparent, internationally accredited firms. Because the credit risk is lower, lenders in developing countries can absorb it and are better able to offer non-recourse factoring.

For example, Heller Financial and Wal-Mart have a reverse factoring arrangement in Mexico. Wal-Mart offers its Mexican suppliers the option of having their accounts automatically factored by Heller and receiving immediate payment of 80 percent of the sale. (The additional 20 percent, less interest and service charges, is paid upon Heller’s receipt of Wal-Mart’s payment.) Although the sellers may not have any relationship with Heller, they can receive shortterm financing because they are borrowing on Wal-Mart’s credit risk. By providing short-term financing, Wal-mart is able to negotiate better terms with its suppliers and reduce its payment transaction costs (by paying one bill to Heller rather than to a large number of suppliers). Furthermore, Heller can raise less costly financing by securitizing its portfolio of Wal-Mart accounts receivable, which has a credit rating equal to that of Wal-Mart. Source: Klapper and Vittas 2003 Participation by lenders in public credit bureaus, typically called credit registries, is often legally mandated above a certain threshold. Most public credit registries are operated by the country’s central bank or bank regulator. These government agencies typically require participation by regulated financial institutions above a certain size (see Miller 2003, p. 37). In some countries, such as Belgium and Italy, this threshold is very low for both consumers and businesses— meaning that participation (and, thus, coverage) is very high.

Unlike public credit registries, private credit bureaus are voluntary. That is, lenders voluntarily provide credit information to the credit bureaus. The inclusion of data on commercial bank loans varies by country. For example, in the United States the three private credit bureaus (Equifax, Experian and Trans Union) collect only consumer loan information, while in Argentina Equifax collects and distributes both private business and consumer information and additional information, such as ownership links among firms and credit scores.

**15**

**THE WORLD BANK**