TRADING HISTORY

No typical exclusions were noted with respect to trading history. However, factors would ideally be looking for clients with an established trading history, typically more than 3 years. However, in line with earlier report comments, clients in the services sector particularly are becoming increasingly more important to factors, and many of these businesses are ‘young’ but with strong customer bases, demonstrating good growth potential and therefore worthy of consideration by factors.

5.6

COSTS OF FACTORING FINANCE

The calculation of the costs of factoring is dependent on the following considerations:

q The factoring product; q The costs of credit; and

q The costs of associated credit management services.

We concentrate in this section of the first two considerations shown above. The costs of services are considered in the following section.

Table 5.4 shows the costs of capital reported by the factoring industry for each country, differentiated by product type. We do not have typical charges for alternative (overdraft) products, but did ask each respondent to confirm the relative competitiveness of credit advanced through factoring to alternative products – the options given were:

q Very Competitive - (factoring is cheaper than alternative)

q Competitive – (factoring is about the same as alternative) q Not Competitive (factoring is more expensive than alternative)

In all cases factoring was reported as being Competitive. The exception was the UK which reported that factoring was Very Competitive.

The question of price competitiveness of factoring finance was raised in our demand side survey of SME Representative Associations. From this survey, 62.5% of respondents felt that, in their opinion, the costs of factoring were comparable, and/or cheaper, than alternative sources of finance (being quoted as bank loans and bank overdrafts). 25% of respondents reported that, in their opinion, factoring is too expensive for SMEs (although respondents clarified these responses as being more targeted at very small businesses).

There was little reported difference between the interest charges for money advanced through either recourse or non-recourse factoring products, with typical quoted mid-range values being 2-3% above bank base rates.

However, it is noted that credit charges for invoice discounting are lower than for recourse and non-recourse, with typical mid-range values reported as 0.5- 1.5%. It is reasonable to suggest that this is so because, typically, clients using invoice discounting services tend to be relatively larger businesses, turning over larger volumes and therefore attract a slightly lower fee, and are in a better position to negotiate.

Naturally there is an issue here over the competitiveness of bank-owned factors versus independent / private factors. Clearly, bank-owned factors should be able to ‘borrow’ money ‘internally’ at base, whereas independent / private factors may well be relying on bank credit lines attracting their own base rate plus interest charges – thereby there is a case for suggesting that the costs of borrowing differ between bank owned and non-bank owned factors, thereby, in principle, affecting their relative competitiveness.

Conversely, whilst the above may well be true, as mentioned earlier in this report, bank-owned factors typically adopt a more standardised and risk-averse approach than do independent / private factors, who whilst they may be slightly more expensive, would still have a market at the fringes.

Table 5.4 Costs of Factoring Credit Advances

Recourse Non-recourse Invoice discounting

Country Austria Eb 1.0% - 3.5% Eb 1.0% -3.5% Eb 1.0% - 3.5% Belgium Eb 1.0% - 5.0% Eb 1.0% - 5.0% Eb 0.85% - 2.5% Denmark Eb 2.0% - 5.0% Eb 3.0% - 6.0% Eb 2.0% - 5.0% Finland Eb 0.5% - 3.0% Eb 0.5% - 3.0% Eb 0.5% - 2.5% France Eb 2.0% - 3.0% Eb 2.0% - 3.0% Eb 0.5% - 1.5%

Germany Deal Basis Deal Basis n/a

Greece Eb 1.5% - 2.5% Eb 1.5% - 2.5% Eb 1.5% - 2.5%

Ireland Bb 2.0% - 4.0% n/a n/a

Italy n/a n/a n/a

Netherlands n/a n/a n/a

Portugal n/a n/a n/a

Spain Eb 1.0% - 3.0% EB 1.0% - 3.0% n/a

Sweden Bb 1.0% - 3.0% n/a n/a

UK Bb 2.0% - 4.0% Bb 2.0% - 3.0% Bb 0.5% - 2.0%

Source: GLE Study Survey Questionnaire 2002 Key - Eb = EuroLibor; Bb –National Bank Base Rate

5.7

COST OF FACTORING SERVICES

All factoring companies pay their client businesses for their invoices as they are received. As mentioned previously, they may also offer one or a combination of credit management services, comprising such as:

q Collect payments from their customers

q Pursue late payers

q Provide advice to clients on credit management q Protect the client against bad debts

The way factors charge for services differs by company – some charge on a ‘menu’ basis providing individually priced service options from which the client can pick and choose – however, it is more common for factors to provide common defined basic services and quote one encompassing standard fee.

Table 5.5 shows typical service fee costs as percentages of factored invoice value. Non-recourse fees tend to be the highest with typical mid-range charges of 1-2%; recourse factoring the next costly with typical mid-range charges of 0.5-1%. Invoice discounting is the cheapest at 0.25-0.5% of invoice value reflecting the relatively few services typically provided with this product. In terms of qualifying these charges through a rudimentary commercial cost- benefit consideration, we can consider three ‘benefit’ elements:

1. The cost of hiring a qualified credit controller is mitigated through using a factor.

2. The possibility of qualifying for a supplier discount (perhaps as high as 5% of gross invoice value) for prompt payment that can be made following the factoring of the invoice.

3. The use of professional credit management services often results in an improvement in the adherence of payment terms to the client – i.e. invoices are paid more quickly. This means that the client is able to repay any pre- payment more quickly, and therefore reduces ‘interest’ charges.

When the above ‘benefits’ are considered against the ‘costs’ of the factoring service element, factoring is arguably a competitive proposition – particularly for smaller businesses.

In Ireland, virtually all factoring is non-disclosed recourse, and therefore the factor is really only providing credit without services. Therefore, they typically charge a negotiated flat annual fee to clients, rather than on a percentage of invoice basis.

Table 5.5 Costs of Factoring Services

Recourse Non-recourse Invoice discounting

Country

Austria 0.5% - 0.8% 1.0% - 1.4% 0.20% - 0.60%

Belgium 0.1% - 0.5% 0.3% - 1.0% 0.05% - 0.25%

Denmark 0.4% - 0.5% 0.5% - 0.7% 0%

Finland 0.12% - 1.35% 0.01% - 1.2% 500 - 700 Euro per month

France 0.4% - 0.5% 0.6% - 0.8% 0.18% - 0.20%

Germany 0.4% - 1.5% 0.6% - 2.5% -

Greece 1.0% 1.0% - 1.5% < 1.0%

Ireland Negotiated Fee Negotiated Fee Negotiated Fee

Italy n/a n/a n/a

Netherlands n/a n/a n/a

Portugal n/a n/a n/a

Spain 0.5% - 2.5% 0.5% - 2.5% n/a

Sweden 0.2% - 0.3% n/a n/a

UK 0.75% - 2.0% 1.0% - 2.5% 0.25% - 0.75%

Source: GLE Study Survey Questionnaire 2002

5.8

IMAGE AND PRODUCT UNDERSTANDING

Image and lack of product understanding were most commonly reported under both the demand and supply side surveys as key constraints to market development and expansion. There appear three components to image and understanding, which are:

q Perception of Inferior Product – reported that factoring has a negative

image as it tends to be provided either by private companies, or specialised banking subsidiaries, with the latter either not owned by, or marketed as, the main business banks. Therefore, it is reported that advisers and companies tend to view it as an ‘inferior’ and more risky product.

q Lack of Product Understanding – this by advisers and companies alike.

In fact our demand side survey of European SME Representative Associations, only 25% of respondents confirmed that factoring was well known to them and that they have looked at it in detail. The majority, 75%, of respondents confirmed that they had only an ‘in principle’ knowledge of factoring. Further, it was reported in particular that not enough advisers sufficiently understand the product to effectively recommend it to their client companies. Therefore, companies not

q Perception by Clients Customers – as reported by several countries,

factoring is often perceived to be finance of last resort – i.e. believing that their suppliers only turn to factoring when their banks have capped their credit facility, which would indicate that the company might be in trouble, which could lead to seeking alternative suppliers. However, with banks entering the factoring market, and increasingly selling through their branch network, it is expected that this will improve the ‘respectability’ of using factoring and overcome its current, often negative, perception.

As touched on above, many SMEs expressed a reluctance to consider giving up control of their sales ledger to an external party. There are a number of reasons why companies might think this way. Most common reasons relate to the perception issues discussed above. Specifically, the perception of their customers to them being in financial difficulty – but also, the perception that factoring is more costly than alternative financing – and finally, issues surrounding trusting the factor to forge and protect the relationship with the customer.