Factoring as an Alternative
Trade Finance Instrument in
a Competitive World
22 November2013 Peter Brinsley
Peter Brinsley - credentials
•
21 years in factoring
•
Now a freelance consultant with Point
Forward
•
Honours graduate of University College
London
•
Post-graduate studies in Accountancy
•
Certificate in Education
•
Chairman of the Education Committee of
International Factors Group (IFG)
Peter Brinsley - credentials
•
10 years as International Manager, ABN AMRO
•
Compliance and Audit, Fortis Bank
•
Risk and Client Management, RBS
•
Training and workshops:
• IFG Academy, 2008-2013 • Cairo Factors, October 2013
• Afrexim Bank: Gabarone 2009; Cairo 2010; Accra 2011 • BCR Receivables Conference, Shanghai 2008
• Faktoring Pro, Moscow 2008
Agenda
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Session 1: What is factoring ?
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Session 2: Factoring legislation and regulation
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Session 3: Setting up a factoring operation
To begin at the beginning…
•
Factoring is a purchase of receivables
– Via a Pledge or Assignment or Subrogation – Transfers rights over the debt to the Factor
•
Factoring is not a loan against receivables
– Significant legal difference
– The factor has rights over the debt. A lender does not; he takes security against the debt
To begin at the beginning…
•
The Factor makes money available against the
receivable
•
It’s not a loan
•
The Factor advances money to the client if the
client requests it
•
It’s not a loan
Factoring v Bank product
•
Bank products
– Overdraft – Term loan
– Loan against receivables
•
Security for the facility: cash deposits,
guarantees, fixed assets…
•
Factoring can advance a higher percentage
because of closer management of the facility
What factoring offers
1. Finance
2. Receivables administration
3. Collections
4. Protection against bad debts
The client has choices…
The Factoring Cycle
Factor
Supplier Debtor
1.Factor issues credit limit on debtor (non-recourse) 2.Supplier send goods to debtor
3. Supplier assigns invoice to factor
4. Factor advances 80% to supplier
5. Factor makes contact with debtor
6. Debtor pays to factor
7. Factor sends balance of money to Supplier
Types of Factoring
•
DISCLOSED
– Debtor knows of the factor’s involvement – Assignment notice on each invoice
– Debtor clears debt by paying to the factor
•
UNDISCLOSED or CONFIDENTIAL or SECRET
– debtor does not know of factor’s involvement – No assignment notice on the invoice
– Debtor pays to a bank account in the name of the supplier but controlled by the factor some
Factoring Products
•
RECOURSE FACTORING
– Supplier (client) bears the risk of the debtor not paying
– Debt is funded for a pre-determined period (typically 90 days from invoice date)
– If an invoice is not paid at 90 days, the client must repay to the factor the advance previously
received
Factoring Products
•
NON-RECOURSE FACTORING
– The Factor bears the risk of the debtor not paying (up to the amount of the credit limit)
– Each debtor is assessed by the factor and given a credit limit
– Client claims against the Factor if the debt has not been paid and there is no dispute
– The bad debt percentage (insured amount) is usually 100% of the value of the debt
Factoring Products
•
NON-RECOURSE FACTORING
QUESTIONS:
(1) Are you able to assess debtors for credit in your country ?
* Factoring products
MATURITY FACTORING
• Provides finance on the invoice due (= maturity) date
• Supplier gets traditional factoring services, and: • Can forecast his cash flow
• Advances before maturity date also possible • Factor can offer payment extensions to debtors • No DSO (‘debt turn’) impact on the supplier
* Factoring products
MATURITY FACTORING
• Agreements:
(1) with Supplier
(2) with Debtor – stating terms and conditions of payment extensions (length of extension; cost of delayed and [agreed] extended payments)
• Interest accrual on debtor’s account starts from maturity date
CONNECT. EDUCATE. INFLUENCE.
* MATURITY FACTORING
supplies invoices SUPPLIER DEBTOR FACTOR Payments Interest Payment extension Advance payments Maturity payment Assignments Interest on advances* Factoring products
MATURITY FACTORING – the benefits
SUPPLIER
* Forecast liquidity
* Can plan ahead with known cashflows
* 100% security against bad debts (with N/R MF)
* Outsource receivables management
* Able to offer debtors more attractive payment terms * Increase in debtor loyalty
DEBTOR
* Extension of payment terms * Additional finance at
competitive cost
* Use supplier debts as
additional source of funds * Increase in supplier’s loyalty
Factoring products
•
INTERNATIONAL FACTORING
Factor
Factoring products
•
INTERNATIONAL FACTORING
•
2-factor
system
Factor
Supplier DebtorFactor
Factoring products
•
INTERNATIONAL FACTORING
•
2-factor
system
•
Import factor
collects the
debt
and
provides credit
cover (n/r)
Export
Factor
Supplier DebtorImport
Factor
International Factors Group
•
The global trade association that represents
and promotes the interests of the factoring,
invoice financing and asset based lending
industry
•
“Connect. Educate. Influence”
•
2-factor (export-import)
IFG – benefits of membership
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Trading partners: 160 members in 60
countries including Egypt, Mauritania,
Mauritius, Morocco, Sierra Leone, Tunisia
•
Education opportunities are cost beneficial for
members
•
Business solutions
– Cross-border factoring – Collection services
IFG – benefits of membership
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Networking opportunities and connections
– Factoring; asset based finance; supply chain
•
Operations guidance
– General Rules of International Factoring (GRIF)
– Mentor support
– Industry information, statistics, archive presentations
Factoring products
•
SUPPLY CHAIN FINANCE
Supplier Debtor
Factoring products
•
SUPPLY CHAIN FINANCE: “reverse factoring”
Buyer Debtor Supplier Supplier Supplier Large and well-rated buyer Factor
Buyer Debtor Supplier Supplier Supplier Large and well-rated buyer Factor
Reverse Factoring
Reverse Factoring
Buyer Supplier Supplier Supplier Large and well-rated buyer Factor1. Invoices from supplier to buyer
2. Approved payables file
3. Early payment to suppliers
4. Buyer pays factor at maturity (or later)
5. Factor pays supplier at maturity (if not previously financed) 1 2 3 4 5
ADVANTAGES TO THE CLIENT Shorter time in realization Factoring facility reflects turnover Better liquidity Can obtain discounts from own suppliers Attract new business through trade discounts Growth without additional borrowing Protection against bad debts Save costs by outsourcing collections
Benefits of factoring
Benefits of factoring
•
To the DEBTOR
– Trading on open account terms – Trade discounts may be offered
– Trade helped by factor’s assessment for credit
•
To the factor’s SHAREHOLDERS
– Return on capital
– Factoring more suitable for SME risk (closer monitoring of receivable)
Factoring in figures: 2012
North America 6% South America 9% Europe 55% Africa & Middle East 2% Asia 25% Australasia and NZ 3%World totals: 2,700 significant scale factoring providers
$2.792billion industry turnover = +8% on 2011 (2011 was +21% on 2010)
$400 billion advanced to 0.5 million clients
