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Al Mal Newspaper
31/01/2010

Egyptian Junior Business (EJB) includes it in its new manual
"Leasing" and "Factoring" are financing tools besieged with lack of awareness
Mona Kamal – Akram Medhat

Numerous business organizations headed recently for initiatives that may support small & medium-size enterprises' sector. Those initiatives include concluding bilateral agreements with concerned authorities to provide financial and technical support or both together. Some initiatives limited their activities to holding numerous meetings that discuss issues related to such sector and provision of different suggestions to remove hindrances that restrict its growth rates and prevent it from being the leading sector of national economy.

The last initiative launched by EJB may be relatively different from previous initiatives, as the Association is getting ready to issue a comprehensive manual about available financing opportunities for SMEs, which will combine all available financing administrations in the market and how to access them, including banks, Nile Stock Exchange, financial leasing, factoring, venture capital, mutual funds and different communication channels with their officials.

In this framework, the Association strives through five meetings, three of which were held to present financing tools and their different advantages that are suitable for choices of enterprises' owners, each as per its financing requirements, as well as the extent of their coherence with the phase of the enterprise. This is in addition to the sector, which the enterprise is covering, whether it is commercial, industrial or service sector, in order to adopt the recommendations of all parties regarding information and data that should be included in this manual. This is a serious attempt to make this manual comprehensive and free of gaps through which a number of available financing channels available in the market may drop at a time this sector is suffering from huge financing gap.

In its previous editions, "Al-Mal" had presented events of the two workshops organized by the Association. The first workshop was about bank financing of the sector, while the second was about Nile Stock Exchange, its significance and obstacles standing in the way of its effecting.

The third workshop was about financial leasing and factoring as financing mechanisms more suitable for SMEs. The role of those two mechanisms, as stated by Mohamad Mohie Eldin, Chairman of Financing and Banks' committee in EJB, comes in the light of banking sector's acquisition- despite its available cash- of a share that does not reach 10% of the total financing obtained by the sector in general.

He added that financial leasing and factoring are mechanisms that suit relative advanced stages of the enterprise and not the preliminary stages, where the first is directed to finance assets represented in machinery, equipment and preparations necessary for different production phases of the project. The second is directed to finance working capital. He pointed out that the two activities are carried out by banks as one of available financing services, but companies working in the same field are characterized by professionalism, experience and use of more flexible policies.

From his side, Ahmed Shaheen, General Director of Egypt Factors, explained that factoring is one of the financing mechanisms, which are more suitable for SMEs, as it is based on financing the working capital of companies through a number of systems like the open system, which is based on the company's purchase of deferred invoices, collect their values and protect purchaser up to 100% of the invoice value, provide a cover up to 98% of its value. The company may also obtain the rest of invoice value at the final settlement with the customer who owns the enterprise.

Shaheen pointed out that the company provides all types of factoring, whether export factoring, local factoring or purchases' factoring, with availability of both "with recourse" and "without recourse" factoring, where the collection means is the invoice.

Regarding the difference between banks and companies, which provide factoring services, Shaheen asserted that there is no significant difference in the service itself, but the difference is in procedures and policies on which financing is made, where factoring companies usually do not request guarantees as done by the banks. Beside that, factoring companies finance smaller projects, especially merchants who are financed with or without recourse on the seller. He stated that against such facilities, cost of factoring companies is higher by half percent than the interest determined by banks.

He also pointed out that there are steps to be followed in the factoring process. First of all is studying cash flows of the project, on which basis the financing ceiling is determined. Priority, in case of factoring, is for companies of quick-circulation and quick-turnover goods; stressing that there is no minimum limit for factoring but there is a maximum limit of it.

He stressed that steps are characterized by speed, where within less than two weeks the contract is concluded, rather than banks that take long time to make the decision. This is in addition that banks prefer financing production lines, while companies focus on invoices that can be collected and consider them as basic guarantee. Moreover, companies provide financing with open-account system, while banks do not provide financing on foreign capitals.

Shaheen added that Egypt Factors is considered the only specialized company in the market; and the Commercial International Bank (CIB), International Financing Institution and number of partnerships are shareholders in it, pointing out that a number of banks currently seek incorporation of financial leasing companies.

Dr. Shahinaz Rashad, Assistant Deputy Executive Manager for Credit and Marketing in the International Company for Financial Leasing (INCOLEASE) said that financial leasing is a contractual relationship between leaser and lessee, according to which, fixed assets are financed by the company and the customer will pay installments, where the asset stays at his possession and is transferred to him after expiration of the contract period.

She stresses that financial leasing is one of the best financing tools for SMEs sector, as it is considered one of the most financing mechanisms that conform to Islamic legislation. In addition, it is a flexible mechanism that could meet enterprise requirements in its different phases and its procedures are speedier and less complicated than bank financing.

She pointed out that INCOLEASE, at the beginning of its business in the market, targeted direction of credit to greater companies "corporate companies", but with the increase of demand for this type of financing by SMEs' sector, INCOLEASE incorporated a sister company, where a number of bodies and companies affiliated to public sector shared in it. This company is called "Al-Saghir for Financial Leasing and it targeted financing this sector.

Regarding procedures precedent to financing process, Shahinaz said that at the beginning, the company balance sheet is requested, provided that it should be made by an auditor certified by the Central Bank or, Auditors & Attorneys Society or one of the private international offices, where customer credit inquiry is made as a fixed step, stressing that the company does not regard the balance sheet volume or takes the decision on its basis and therefore refuses small balance sheets, but financial leasing focuses on cash flows beside the volume of business and revenues, so that at the end, revenues and expenses are balanced against each other to show the capability of payment.

Ahmed Daif, General Director of Al-Tawfiq Company for Financial Leasing, explained that the reality of Egyptian market indicates existence of three types of financial leasing companies from the aspect of property structure, the first type is fully owned by banks and its financing and credit policies are fully conforming to the bank policy, where it requires many guarantees and procedures, and it follows conservative policies to limit risks as far as possible.

The second type is represented in those companies, where banks do not represent controlling share in them like INCOLEASE and Al-Tawfiq. Policies of such companies are more flexible and characterized by temperance regarding decision making related to financing. The last type is the private companies owned by individuals, where their financing polices differ according to their owners between rigidity and flexibility.

Daif stressed that despite the importance of requesting balance sheets as a preliminary step to obtain financial leasing, balance sheets are not considered the basic reference of enterprise financial status, hinting that since the issuance of the new Tax Law of 2005, there are complete disclosure rules, where they have registered auditors in order to guarantee balance sheet transparency. But financial leasing companies deal with cash flows originating from the working capital, which the company considers a basis for judging customer competence and eligibility.

Daif ensured that financial leasing, upon calculation of the total financing cost, is cheaper than bank financing, while it is characterized as a financing mechanism, by tax advantages for all companies dealing with it, which are not available at other mechanisms, as the full leasing installment will be deducted from the tax vessel of the customer and companies themselves will obtain such exemptions.