This finance gap is particularly concerning because SMEs play a crucial role in driving trade, economic development, and employment in Georgia. Given these challenges, factoring can provide substantial benefits for businesses by enabling quick structuring, meeting SMEs’ objectives such as releasing cash trapped within their balance sheets and accessing alternative funding sources at competitive rates, thereby promoting inclusiveness.

The National Bank of Georgia, as a key stakeholder, is actively supporting the country’s long-term economic growth by promoting the development of factoring. This effort aims to establish a solid foundation for the broader private financial sector to provide SMEs with finance solutions through receivables finance.

Collaboration is key

Since 2020, the National Bank of Georgia has been closely collaborating with the European Bank for Reconstruction and Development (EBRD) and Investors’ Council Secretariat (ICS), alongside the Ministry of Economy and Sustainable Development, Ministry of Justice, and Ministry of Finance. 

This collaborative approach includes active participation in a Factoring Working Group facilitated by ICS, bringing together stakeholders from the factoring industry, commercial banks, micro-finance organisations, legal experts, and the public registry. 

Additionally, since 2023, the International Finance Corporation (IFC), in collaboration with the National Bank of Georgia, has worked to develop guidelines that provide capacity and knowledge to banks and DFIs, and promote growth in non-traditional lending solutions for SMEs. 

Furthermore, the World Bank and the Ministry of Economy and Sustainable Development of Georgia are developing a legal framework for secured transactions, addressing factoring issues. Under this framework, all transactions registered in the factoring registry will receive priority over other security claims. 

This reform supports the advancement of the factoring market, meeting urgent demands from the business sector and the factoring initiative is more advanced compared to developments in secured transactions. These ongoing collaborations aim to advance factoring legislation and digitalisation in Georgia.

The growth and decline of factoring in Georgia

The latest data from the Service for Accounting, Reporting, and Auditing Supervision (SARAS) indicates that in 2022, the total trade receivables of corporations in the first, second, and third categories reached approximately 8.8 billion Georgian lari (GEL). This represents a 23% increase compared to the previous year, and aligns with an annual average growth rate of 20% observed over recent years.

Many factors, including cross-company receivables, influence the amount of fundable receivables, yet the data remains promising. Despite the stable growth and high volume of trade receivables, the volume of factoring transactions remains relatively small and subject to significant fluctuations. 

In Georgia, although micro-finance organisations, micro-banks, and commercial banks are authorised to offer factoring services, only some commercial banks currently engage in this practice. These banks primarily focus on domestic factoring, but recent trends indicate a small yet growing interest in international factoring. 

In 2019, the top three banks, which are primarily factoring providers, totalled 165 factoring transactions, with international factoring accounting for two transactions and 990,000 GEL out of a total volume of 358 million GEL. 

By 2022, the number of transactions had surged to 44,000, with international factoring accounting for 17 transactions and 3.9 million GEL out of a total volume of 670 million GEL. 

However, in 2023, there was a 50% decrease in the number of transactions and a 21% decrease in volume compared to 2022.

The main reasons and shortcomings responsible for the lower uptake of factoring in Georgia may be summarised in the following types of market gaps:

• Lack of necessary legal and regulatory framework;
• Lack of technological infrastructure;
• Lack of knowledge and capacity.

Limiting factors

Factoring in Georgia is currently constrained by substantial financial and legal hurdles. 

Key issues include: 

• The debtor’s right to limit the transfer of receivables to the factor;
• Lack of robust legislation to clearly define rights and obligations in factoring transactions;
• Inadequate regulation of factoring activities;
• The absence of established criteria for registering factoring companies. 

These challenges significantly limit the potential for factoring in the region and restrict SMEs’ access to the tool.

The new law aims to address these challenges comprehensively by establishing a clear legal framework. 

It will prohibit debtors from restricting the creditor’s ability to transfer receivables to the factor or imposing additional conditions on such transfers, define eligibility criteria for receivables suitable for factoring, clarify procedures for registering ownership rights, and mandate the creation of a centralised factoring register. 

This register, linked to the Georgian Revenue Service’s electronic invoice database and under the ownership of the National Agency of Public Registry, will prevent “double factoring” and ensure the validity of ownership claims. Additionally, the law promotes the development of an electronic platform tailored for factoring transactions, providing a virtual space where parties can initiate, manage, and complete transactions securely and efficiently. 

By enhancing transaction transparency, facilitating real-time monitoring, and enabling seamless communication between stakeholders, this centralised platform aims to foster fair competition among factors and potentially reduce financing costs. 

The role of the electronic platform would be twofold. First, it would facilitate a multi-funder approach, allowing smaller or new players to access the factoring market by alleviating the significant costs associated with required technical infrastructure. Second, it aims to introduce competition through a marketplace approach on the electronic platform. 

Moreover, as factoring may be perceived as a risky undertaking, risk-sharing and insuring practices are not easily accessible. However, the registry and platform will support factoring companies in mitigating risks by enabling them to use data to better evaluate customers, thereby promoting stability in the sector. 

The work on the design of the electronic platform is currently underway in close cooperation with the IFC. Simultaneously, efforts to find a prospective financier for the platform are ongoing. The ownership of the electronic platform is likely to take the form of a Public-Private Partnership, where the state will collaborate with international organizations to deploy and operate factoring transactions, and potentially expand to include other trade finance products following secured transaction reform. 

Importantly, the draft law does not mandate the existence of a centralised or state-owned platform. The Draft Law on Factoring, incorporating all the aforementioned legal and technical provisions, is expected to be enforced in early 2025.

In addition to current regulatory efforts and planned technological improvements in factoring, a credit information bureau plays a crucial role in Georgia’s financial ecosystem. Registered with the National Bank of Georgia, Creditinfo Georgia JSC is the country’s sole credit bureau. Its functions include collecting, storing, processing, and issuing credit information about both individual persons and corporate entities, which includes details of loans and other obligations to form the user’s credit history. 

The bureau ensures customer consent before sharing any related information with third parties. Additionally, it provides financial sector representatives and other users with insights into how customers manage their financial obligations. 

Based on this credit history, the bureau determines and reports the customer’s credit score and rating, offering interested parties an assessment of the associated lending risk and the likelihood of repayment.