WITH technology conglomerates’ growing engagement with small and medium size enterprises (SMEs), over the last four years a model of so-called “double factoring” – a type of debtor financing whereby a company sells receivables at a discount to meet current funding needs – has taken shape in China. This has now become a sustainable business model across different industries, including banking and e-commerce.

Large e-commerce companies, such as Alibaba and JD.com, have set up in-house finance or factoring companies as subsidiaries to fund and support thousands of SME clients, which have a large number of receivables on their balance sheets.

The proliferation of factoring subsidiaries forms part of e-commerce companies’ expanding “ecosystems” – a term mentioned 24 times by Jack Ma in an internal letter to Alibaba’s employees following the 2014 IPO.

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.

“Banks fund the factoring companies by matching their factoring activities to their procurement department,” says a transaction banking head at an international bank in an interview with The Asset. “We need to see the real trade invoice of the procurement entity and suppliers, as well as the factoring contract with the procurement companies.”

This unique set up not only helps suppliers meet their immediate cash needs, but also enhances the asset liquidity of the in-house factoring companies, and with a lower funding cost compared to bank loans. Chinese e-commerce leaders Alibaba, JD.com and Suning, all with large supply chains, have all set up in-house factoring subsidiaries.

As an alternative, in-house factoring companies can also sell their receivables to the capital market through asset backed securities (ABS). In the first three quarters of 2017, Alibaba and Ant Financial were the largest ABS originators in China, originating a total of 148.8 billion yuan (US$22.4 billion) through their in-house finance companies, data from China Securitization Analytics (CNABS) show.

Currently, factoring companies, financial leasing companies and banks, all regulated by China Banking Regulatory Commission, are able to provide factoring services. While bank factoring is considered a type of secured loan with receivables acting as the collateral, factoring services from non-bank financial institutions (as in the case of double factoring) are not considered a type of securitization. While both are considered off balance sheet, the latter is more in line with international practice.

In October 2017, the State Council issued guidelines on proactively promoting innovation and application of the supply chain, in order to accelerate the innovation and application of supply chain finance and promote supply-side structural reform. This document was the first mention of supply chain finance at the State Council level.

“(In-house) factoring companies are relatively new,” says the transaction banking head. “[Setting up] finance companies is very common, especially among privately-owned enterprises. They centralize their treasury activities for these business units under the same groups.”

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