Rep. Kim Han-jung, sitting on the National Assembly National Policy Committee. (Photo : Rep. Kim Han-jung's office)

Rep. Kim Han-jung, sitting on the National Assembly National Policy Committee, stressed policy support for factoring business to help financial strapped SMEs.

Factoring refers to a kind of debtor finance in which businesses purchasing goods and services issue promissory notes (accounts receivable) to sellers, which factor them into a discount.

Rep. Kim, a lawmaker of the Namyangju-B constituent in Gyeonggi-do, said on Oct. 15: “Factoring with the right to recourse is a good system for financially strapped SMEs, since sellers can recoup accounts receivable at an early date without fear of chain bankruptcies.” He called for policy support to expedite factoring.

Factoring without recourse, handled by Korea Credit Guarantee Fund (KODIT), is a kind of debtor finance in which money is provided at a lower fee rate of 2 to 3 percent, based on abundant corporate information, so sellers have an advantage of retrieving accounts receivable without fear of chain bankruptcy, Rep. Kim said.

“The factoring business without the right to recourse accounts for half of the global factoring market, but the Korean factoring market, in an initial stage, needs to be invigorated,” he said.

In Korea, most factoring allows companies to have the right to recourse, so if companies buying goods and services are bankrupt, factoring companies demand sellers to pay up the related payments, causing chain bankruptcy. KODIT was designated as an innovative financier in the government’s regulatory sandbox scheme in April 2020.

KODIT became the financial industry’s first institution to introduce a factoring project without recourse in January. But KODIT offered a meager 11.6 billion won worth factoring for the first nine months of this year. The financial institution sets an annual target of 40 billion won worth of factoring.

Rep. Kim said, “KODIT’s factoring business will be a great boon to financially strapped SMEs.” He urged the government and the National Assembly to make efforts to reinvigorate the factoring business through legal complementation, such as the revision of the Act on KODIT and budgetary support.

Heads of financial institutions, including Chairman Koh Seung-beom of Financial Services Commission, KODIT Chairman Yoon Dae-hee, KDB Chairman Lee Dong-gull, IBK President Yoon Jong-won, Korea Eximbank Chairman Bang Moon-kyu, KAMCO President Moon Sung-yu, and HF President Choi Joon-woo, discuss the pending issues, including financial support to SMEs, at the Korea Federation of Banks in Seoul on Sept. 28. (Photo: Financial Services Commission)