The Economic Development Strategies of both the Republika Srpska (RS) and the Federation of Bosnia and Herzegovina (FBiH) acknowledge the significant role of small and medium-sized enterprises (SME) as the engine for growth of the Bosnian and Herzegovinian (BiH) economy. Developing SMEs is an important element of the integration process leading toward European Union (EU) membership. Limited access to financing places critical constraints on SME growth, however. In a dynamic business environment, a company gains competitive advantage by managing its liquidity through the market. During the present period of economic instability, companies in BiH are trying to bridge their liquidity problems in various ways and find new modalities to finance working capital and investment projects. Cash-flow is essential to ensuring the smooth functioning of business operations. Traditionally, businesses have relied on overdrafts and loans. Other forms of finance, however, can increase the amount of finance available to a business, as its sales increase. Factoring is one way for SMEs to improve their cash flow.
Factoring is gaining popularity as a source of external financing for corporations and SMEs around the world. What makes factoring unique is that the money provided by a factor to a business is explicitly linked to the value of its accounts receivable and not its overall creditworthiness. This allows high-risk suppliers to transfer their credit risk to high-quality buyers. BiH does not have specific laws and regulations on factoring, although a legal framework does exist. Factoring allows funds to circulate faster and ensures the liquidity and solvency of the real economy. The turnover of funds can be accelerated, primarily by introducing factoring as a new financial product.
Unfortunately, the factoring market in BiH is underdeveloped, with little competition between factoring companies. Worldwide, factoring has not yet experienced financial crisis. While the financial sector generally was badly hit by the crisis, the world market for factoring showed growth in 2008, as it had through the previous decade.
Links provide more information on factoring generally and the various forms it takes.