A Study on the Development of Factoring Business in Taiwan

Taiwan relies heavily on import/export activities. Before 1985, 80-90% of Taiwan exports were made on L/C terms, while this ratio declined gradually year by year. Now, only 15% are made on L/C terms, and the remaining 85% are made on OA and D/A terms. OA and D/A terms mean that exporters are under great funding pressure, have to bear importer’s credit risk and also they have to provide collection and account management services. However, along with Taiwan’s liberalization on financial market, factoring is introduced to answer the need of Taiwan exporters. The purpose of the research is, therefore, aimed to identify a means of fund management, which is suitable to Taiwan business environment.

The research was based on interviews with key persons of companies, banks, factors and insurers etc. It was also based on reports, thesis, and books written by authors in Taiwan or abroad. This research concludes that factoring, one of the fund management tools, may be further promoted by Taiwan business sectors.

Factoring is a traditional financing product. It began with “two factor” concept i.e. two different factors take respective responsibilities of importer and exporter. Under this two factor factoring, factors have to participate in international factors organizations as a member, which imposes high entry barrier. “Two factor” factoring is restructured and becomes a simpler “one factor” concept i.e. only one factor appears in the trading activities and buyer’s risk is passed over to insurance company. As a result, local institutions involved in factoring business increased from 3 in 1998 to 21 currently. Business volume of Taiwan factoring grew substantially from EUR 1 billion in 1998 to EUR 16 billion in 2003, representing 16 times of growth within six years.

Supported by the government’s incentive program, local electronic industry structured an integrated supply chain since 1999 to connect international vendors with local OEM/ODM manufactures (Plan A) and further with medium sized local suppliers (Plan B). Furthermore, banking sectors were invited to add cash flow management capability (Plan C) to the supply chain in 2002. Factoring is included as one of the major financing products in Plan C.

Industrial Bank of Taiwan arranged the first issue of receivable-based commercial paper in Nov. 2004. This issue brought securitization concept to factoring. Through securitization, companies envisage to access funding source aside from banking sector providing more stable, cheaper, longer terms fund.

Based on the above findings, banks will continue to offer factoring product, companies should include factoring as one of their fund management tools and the government is able to gradually educate local companies to realize the importance of receivable quality and liquidity.