Al Mal Newspaper
During the first International Factoring Promotion Conference in Cairo:
“Factoring”: an alternative solution for instant finance and debt protection
“Domestic” and “Purchase” expected to kick off
4 m traders will benefit from the new tool
Officials cooperate to educate producers on a must for growth
By NASHWA ABDEL WAHAB. Al-Maal, 17 January 2010.
Factoring in Egypt moved forward by leaps and bounds in 2009. It grew at a rate of 120% to reach a volume of $ 110 m vis-à-vis $60 m in 2008, and is expected to experience remarkable upheaval this year, given the possible entry of new players into the market, and increased awareness of producers and exporters with the new product as it is an alternative tool to enhance cash flows and provide protection against risks of non-payment by clients. In addition, it provides a package of diverse financial services that include collection of debts and instant finance, thus facilitating trade flow.
Jeroen Kohnstanmm, Secretary General of the Factoring Chain International (FCI) stressed that FCI’s purpose of holding its 1st factoring conference in Egypt was to raise awareness of export growth potential through adopting factoring, a new comer to the Egyptian economy since 2005. He pointed out that factoring grew fast all over the world so much so that factoring companies doubled to become 1,809 companies in 2008.
Mr. Kohnstanmm added that FCI was working on increasing the number of its members, which currently stands at 252 members from 66 countries. The turnover of factoring activities implemented by the FCI members reached $1,109 billion.
The Secretary General listed factoring services, i.e. collecting invoices, advancing payments on account of invoices, and providing protection against risks of non-payment, noting the high flexibility a producer has in his trade dealings on open account and exporting goods on credit terms.
He added that the volume of factoring in Egypt was relatively low, with a gross turnover of about $33 m in the Egyptian market in 2009, as compared with other countries, such as Turkey ($ 2,073 m) which has the same number of population.
He expected that factoring would gain momentum at the international level and in Egypt in the coming period when demand for exports grow, arguing that factoring improved in the last quarter of 2009 after its turnover shrank at the beginning of the year as a result of the impact the world financial crisis had on countries in various degrees, which consequently resulted in low demand on exports and factoring.
Marius Savin, General Manager of Egypt Factors, stressed that his company provides its clients with an integrated package of factoring services with the purpose of supporting their trade dealings and promoting international as well as domestic trade flow. These services include several finance solutions that support both exporters and importers, especially small and medium enterprises of which their transactions represent 80% of the total factoring portfolio in the company.
He added that the company provides an integrated set of factoring services, the most important of which is the finance service wherein up to 90% of the value of receivables and purchased commercial papers is paid, thus providing cash flow to clients and turning their sales on credit to cash sales. This is reflected positively on increasing the turnover, even doubling it. In addition, there are administration and collection services where the factoring company collects invoices and commercial papers from buyers when they fall due. There is also the bad debt protection service which guarantees payment of the covered value due from the buyer and settle unpaid invoices in a short time after their maturity date.
Mr. Savin highlighted the increase in factoring activities in Egypt as provided by Egypt Factors, the first company to be specialized in factoring, in addition to the Exports Credit Guarantee Company of Egypt (ECGCE). In 2009, the volume was $110 million, with $60 m handled by Egypt Factors (compare $ 1 million in 2005). That year witnessed a growth rate of 120% compared to 50% in 2008.
He explained that there were several factoring products: international factoring (exports and imports), domestic factoring, and purchase factoring. International factoring, he added, represents 60% of total turnover of the company. It is an effective tool to promote foreign trade, especially for dealings on open account and credit system (due after 180 days), which are transacted by small and medium enterprises, as well as large corporations. In case of default, this kind of service, with its two types (i.e. “with recourse factoring” and “without recourse factoring”) facilitates the execution of these transactions. He added that export factoring is useful in providing the client with instant finance, guaranteeing debts, managing credit risks, and collecting invoices from different markets.
On the other hand, Ahmed Shaheen, General Manager of Egypt Factors, expected that domestic factoring, with its two types (i.e. “with recourse factoring” and “without recourse factoring”), and representing about 40% of the factoring business in the company, would experience a remarkable growth in the coming period. He explained that “with recourse factoring” is suitable for small and medium enterprises as it provides instant liquidity to the company, thus helping it grow its business as finance is related to volume of sales. Meanwhile the factoring company would assume the task of collecting invoices when due.
Shaheen went on to explain that domestic “without recourse factoring” is suitable for large, multi-national, and listed corporations as it helps them avoid non-payment risks and enhances their cash flows and profits. This requires sufficient credit studies by the factoring company and access to information about buyers.
Purchase factoring, he added, suits medium-sized enterprises with good financial performance, which rely on credit purchases. Under this kind of service, the factoring company pays, on behalf of its clients, and on a periodical basis, to domestic as well as international suppliers while the purchaser undertakes to pay the invoice to the factoring company when due. This helps importers without the need to initiate documentary credit, or negotiate with foreign suppliers.
The General Manager highlighted advantages of factoring vis-à-vis bank finance: under the former, factoring takes place after selling whereas it occurs before and after sale under the latter. It also applies to open accounts without the need for guarantees. Moreover, it is related to the increase in the company’s sales, but not the volume of its budget. In factoring, there are two kinds of factoring: “With recourse factoring” or “without recourse factoring”. Bank finance is always related to a right to remedy against the seller.
Ali Moussa, Chairman of Cairo Chamber of Commerce, affirmed that factoring is the optimal solution for Egyptian traders (about 4 m), especially for exporters, whose account for 25% of that figure, and having transactions that do not exceed L.E 60,000 per month (equivalent to $10,000). Such group finds it difficult to have access to bank finance through opening documentary credit given the small size of loans. Inaccessibility of sufficient finance necessary for sustaining growth of businesses doubles burdens for exporters. Factoring, on the other hand, plays an important role in providing owners of small and medium enterprises (who represent 95% of businesses in Egypt) instant funding against the least guarantees.
Chairman of Cairo Chamber of Commerce went on to point out advantages of factoring, i.e. opening new markets for Egyptian exporters, especially in Arab countries where trade exchange depends on transporting goods without the need for documentary credit. Other potential markets exist in African countries which are difficult to penetrate directly and need a financial intermediary such as factoring companies which have the capacity to follow up on and collect invoices.
Mr. Moussa expected that factoring would play an effective role in growing the Egyptian economy in the coming period, especially inside the domestic market with a local turnover of L.E 455 billion annually. Domestic factoring, he added, is useful for local producers, especially small-sized ones who act as the main suppliers for large entities.
Galal Al-Zourba, Chairman of the Federation of Egyptian Industries, stressed the importance of the role of factoring being an alternative option for providing instant finance, especially for Egyptian exporters, with the purpose of mitigating risks they face in the wake of the financial crisis. Such risks include, for example, diminishing capacity of foreign client importers to pay the invoices of their imports. In addition, foreign importers wish to apply the open account system instead of the letter-of-credit system, which aggravated the risks for Egyptian exporters. He added that factoring provides immediate finance equivalent to the value of invoices without guarantees. In addition, it provides protection against the risk of non-payment.
Al-Zourba called for cooperation of all concerned entities to promote and raise awareness regarding role of factoring and its advantages as a finance tool in lieu of bank finance with the purpose of promoting Egyptian exports, production and local trade dealings (through domestic factoring).
China and Turkey Rank Ranking Top of International Factoring Business
China and Turkey ranked top of FCI international factoring performers, with a turnover of $4.073 b and $ 2.075 b respectively.
During the first session of the first International Factoring Promotion Conference, Jiang Shu, member of the FCI Executive Council, presented development of factoring in China. He explained that it started 20 years ago and its figures rose sky-high during the last five years, which earned China the lead position in international factoring market. Its turnover totals 2.24 billion Euros (equivalent to $4.073 b) as compared to 494 million Euros achieved in 2005. He said that the Bank of China, ranks first among the five top factors, with a turnover of 1.47 billion Euros. He illustrated the benefits of international factoring for exports and imports: it provides instant finance up to 90% of the value of the invoice. Unlike banks requiring guarantees from companies, the amount paid is given on the basis of their working capital without being related to their assets, thus accelerating growth of production. Another benefit is that factoring provides protection against the risk of non-payment, which is achieved through pre-assessment and continuous follow up on the debtor as well as management of credit risks.
Shu added that other advantages of factoring include enhancement of the financial position of a company through getting finance in the form of advances. This, he explained, enabled Chinese companies, especially small and medium enterprises, to continue their work, focus on their sales, and grow business without being entangled in the formalities of pursuing invoice collection.
Shu explained the varying effect of the international financial crisis on the factoring activity in China, which was like a double-edged weapon. Although it whetted the appetite of exporters for factors to mitigate potential risks, they met difficulties in exporting their products, i.e. the risk of non-payment by most clients, difficulty of finding intermediaries to assume responsibility for high risks, which pushed factoring figures back: from 2.676 billion Euros in 2008 to 2.24 billion Euros in 2009.
Catagay Baydar, vice chairman of FCI, which actually started the factoring product in 1990 as a finance alternative to provide cash flows and invoice collection services for small and medium enterprises in Turkey, observed that Turkey has managed to rank No. 2 in FCI, following China, in the activity of international factoring, with a turnover of $2.075 billion.
Mr. Baydar pointed out that export factoring had grown in Turkey by 22.44% during the period of 2000-2009, adding that there were 75 factoring companies with a staff of 3,000 to serve more than 38,000 customers and carry out 63,000 factoring transactions.
Mr. Baydar stressed that factoring overcame problems (such as different nationalities of their importers and consequently different currencies, and low working capital due to reliance on bank loans) which Turkish exporters had to face earlier and which nipped the growth of their exports. However, he stressed that factoring currently plays a major role by providing simple finance solutions, collecting invoices from importers and providing 100% protection [for exporters] against risks of non-payment.
He also pointed out the obstacles Turkey had to grapple with at the startup of the new activity, including lack of governing rules and laws, absence of customers’ and exporters’ awareness of the new product, and accountants’ concern over switching from traditional accounting methods to new ones.
A Training Program for FCI members in the Middle East
The Factors Chain International (FCI) held a two-day training course for its members from existing and new international factors in the Middle East on the sidelines of the first International Factoring Promotion Conference.
Jeroen Kohnstanmm, FCI Secretary General, pointed out that the FCI training course aims at training its existing as well as new member factors in the Middle East region, and companies which wish to take up factoring in the coming period, with the purpose of promoting awareness of the concept of factoring, and enhancing skills of members. This will facilitate professional delivery of factoring services and will educate them on the experiences of other countries in factoring.
He highlighted the significance of that program given the fact that it is the first one to be conducted in Egypt and targets countries in the Middle East. It is one of the training programs that the FCI conduct on an annual basis through the internet format or lectures given in these countries.
The program is delivered to 6 trainees from Egypt Factors, the first factor in Egypt, as well as trainees from the Export Credit Guarantee Company of Egypt (ECGCE) (on behalf of Egypt), and other trainees from Dubai, Qatar, Lebanon, and Morocco.