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FINANCIAL MANAGEMENT - COMPANIES DISCOVERING NEW FORMS OF FINANCING

Factoring receivables helps Slovak firms boost EU exports

IN ONE of the many by-products of Slovakia's entry to the European Union, more and more firms penetrating new EU markets are turning to external specialists to provide credit insurance and to help them manage their receivables. These operations, known as factoring, have experienced a boom over the last two years in Slovakia.

Firms regularly exporting goods can benefit from factoring.
photo: ČTK

IN ONE of the many by-products of Slovakia's entry to the European Union, more and more firms penetrating new EU markets are turning to external specialists to provide credit insurance and to help them manage their receivables. These operations, known as factoring, have experienced a boom over the last two years in Slovakia.

In factoring, accounts receivable are purchased before they are due by a factor, which is a person or firm that accepts accounts receivable as security for short-term loans. In selling their receivables to a factor, firms relieve themselves of the cost and risks of credit and collection, and get quick cash on contracts closed.

The factor charges a fee for performing the credit and collection function, meaning that the client may get 70 to 85 percent of the receivables up front, and then additional money when the debt is recovered, minus expenses and commission. Rates depend on whether the factor or the client is on the hook for bad-debt losses, as well as on the nature of the business, the stability of the product lines, and whether the client is a manufacturer, wholesaler or retailer.

According to the Association of Factoring Companies of Slovakia (AFS), the value of receivables financed through factoring rose by 62 percent in 2004 from the year before, slowing to 25 percent in 2005. Factoring companies expect 30 percent growth in 2006.

Apart from the increase in turnover, the growing number of factoring companies also demonstrates how attractive this financial service is becoming for Slovak companies. HVB Factoring was established in 2004, while NLB Factoring was created last year. The AFS currently has 8 members.

Despite the favourable numbers, market players emphasize there is still much to be done before factoring takes its proper place among forms of financing.

"Companies are discovering the advantages of this form of financing. The trend was supported by Slovakia's accession to the EU and by the resulting growth in the export activities of Slovak companies," said Oldřich Netušil, AFS chairman and board chairman of Factoring of Slovenská sporiteľňa (SLSP).

"However, I still think we need to achieve a better understanding of the added value that factoring represents. It's not just about financing receivables."

"The share of factoring on the overall volume of financing in Slovakia is still not comparable with neighbouring countries," added Tatra banka spokesman Roman Začka. Tatra banka has a factoring division.

Dušan Čižmárik, chairman of the board of VÚB Factoring, said factoring had enormous growth opportunities in the area of "factoring without recourse", where the factor bears the entire burden of collection and bad-debt losses from buying accounts receivable. This arrangement is especially attractive to companies with tight cash flows that cannot afford extraordinary bad-debt losses.

OB Heller Factoring noted that in the past firms used factoring mainly as a way of solving cash shortfalls. Now they are more interested in sophisticated business risk management tools and outsourcing receivables management.

"Factoring, like other areas of the financial market, is moving towards greater and greater specialization. Clients are no longer looking for individual products, they want complete solutions," said Vladimír Lehocký, business director with OB Heller.

Factoring companies say that financing through factoring is suitable mainly for firms that supply their customers on a regular basis, and those that need additional operational financing due to seasonal fluctuations.

It is also advantageous for firms that issue their customers "supplier loans" - invoices that are due anywhere from 14 to 365 days after delivery of the goods. Factoring makes sense when firms start operating on a new market, when direct payment is the method of payment, and when companies want to save money on receivables administration.

"Factoring is used mainly by small and mid-sized businesses to ensure payment on their invoices," explained Factoring of SLSP's Netušil. However, he said, large companies have also started to take an advantage of debt collection, part of the factoring services package.

Factoring companies are frequently part of a banking group, allowing them to provide financial resources to clients at all phases of the business cycle. Unlike banks, however, factors are less concerned with a client's history than with its future, vision, intentions and ability to fulfil its plans. "That's why we're able to finance start-up firms, take-overs and restructuring," Lehocký added.


History and benefits of factoring


According to the Credit Research Foundation, factoring grew out of the need for working funds in some industries, originally the textile and apparel trades. It had its inception in early American history, when factors acted as commission merchants handling goods on consignment.

But it was not until the turn of the 20th century that factoring really took off, sparked by the entrance of a variety of financial institutions into the field, and the widespread use of such financing by different lines of business.

Why companies use factoring agencies:

- to limit credit and collection expenses (including credit losses) to a fixed percentage of sales on credit

- to reduce the ratio of credit and collection expenses to overall costs (including credit losses) and improve the efficiency of credit and collection

- to increase sales on credit through the collection services provided by the factor

- to increase profits by focussing on product development, production and sales

- to even out the business cycle for highly seasonal businesses which overwhelm their credit, bookkeeping and collection staffs during peak season but leave them idle during the slow season

- to handle international trade without the need for in-house expertise


Turnover and market share of factoring companies
Turnover in billions Sk*
  2003 2004 2005 Market share in 2005
Factoring SLSP 4.4 11.6 14.2 46 %
OB Heller 5.2 4.5 5.4 17 %
VÚB Factoring 2.5 3.6 4.3 14 %
Tatra banka 2.0 2.4 2.9 9 %
OTP Factoring 0.9 2.2 2.3 7 %
Transfactor Slovakia 0.8 1.3 2.0 6 %
NLB Factor - - 0.2 1 %
Total 15.8 25.6 31.4 100 %
*€1 = Sk37.4
Source: AFS

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