As China’s tech giants continue their quest to tap into the potential of small and medium size enterprises (SMEs), a new model of “double factoring” — a type of debtor financing whereby a company sells receivables at a discount to meet current funding needs — has emerged.
Dennis Hong at The Asset explains the financing model, which has become a sustainable business model across different industries, including banking and e-commerce:
Double factoring works like this. The in-house factoring companies purchase receivables from their suppliers. However, as the factoring companies are different legal entities from the parent tech conglomerates, the factoring companies may not meet the large funding requirements needed to fully support this function. As a result, transaction banks effectively fund the factoring companies by acquiring receivables from them. The dual-layered model gives the name double factoring…
The unique model helps suppliers meet immediate cash needs, and at the same time enhances the asset liquidity of in-house factoring companies. E-commerce giants Alibaba, JD.com and Suning have all set in-house factoring subsidiaries.
Banks fund the factoring companies by matching their factoring activities to their procurement department, one transaction banking head at an international bank was quoted by Hong as saying. The practice allows banks to see the real trade invoice of the procurement entity and suppliers, as well as the factoring contract with the procurement companies.
The proliferation of the subsidiaries is part of the e-commerce firms’ expanding “ecosystems,” — a term, Hong recalls, was mentioned 24 times in an internal letter from Jack Ma to Alibaba employees following the company’s 2014 IPO.