Factoring, a Modern Financing Alternative of Romanian Companies Limited by Shares

Transcription

1 Factoring, a Modern Financing Alternative of Romanian Companies Limited by Shares Certified accountant Liliana-Mioara STANCIU Mr.assist.prof. PhD Leontin STANCIU Nicolae Bălcescu Land Forces Academy, Sibiu Abstract In a functional market economy, the firms, regardless of their size, must dispose of financing modern instruments, meant to support the optimum conditions in order to manage the liquidities. Among these instruments, we mention factoring, that presents its functioning mechanism within communication. Starting from the theory and practice of factoring, on the international level, the authors present certain features of this being used on the Romanian financial market. The development and the improvement of the market economy involve, among other things, the use of some modern financing tools, which have to provide firms with favorable conditions for liquidities management. Factoring is one of the modern financing tools, which assures the necessary financial liquidities the good-suppliers need in order to improve their payment ability. Factoring represents on the global market a financing possibility, preponderant congruent with goods selling, by which book debts on maturity can be immediately converted into liquid financial tools [1]. In the central and eastern European countries, people began resorting to factoring in 1995, due to the substantial advantages provided by this complex tool. The statistics register an ascending trend of the transactions value for each country, as it also results from chart number 1 [2]. Chart no. 1 Factoring development in Central and Eastern Europe Year Country mil. Euro Bulgaria Czech Poland Year Country mil. Euro Romania Slovakia Slovenia

2 Hungary Source: Financial market, statement supplied by Factoring Chain International Basically, factoring consists in converting debts resulted from good deliveries or services supply, into liquidities. By the factoring contract, a factor (factoring company) binds itself to buy the book debts from a factoring customer (goods and/or services supplier), and to prefinance them by discounting. Hereby, factoring represents a modern alternative of congruent financing of goods selling and of services supply, where book debts can immediately or on maturity be converted into liquidities. The main advantage of factoring consists in the improvement of the treasury flows, which, therefore, do not depend any more on the possible liquidity problems which can affect the factoring debtors. The factoring customers also benefit of a quick financing, because the documentation is simplified by comparison with the necessary documentation needed for a credit from a bank, and it also does not need a guarantee establishment. Schematically, the use of this modern financing technique materializes as in figure no. 1: FACTORING SUPPLIER (Factoring customer) Factoring contract Debts transfer FACTOR (Factoring company) Goods and/or services delivery Debts payment The purchase and the paymantof ther debts from goods deliveries and/or services supply BENEFICIAR (Factoring debtor) Fig. no. 1 The mechanism of factoring On the base of the factoring contract, the factor pays the debt value to the supplier reduced with the interest or the commission for the intermediation of the clearing operations, for risks and other supply of services, and collects the value of the debts from the goods or services beneficiary on the date of maturity established in the commercial contract with the factoring customer. In a theoretical ideal conception, the factoring operations develop according to a deltoid relation chart, in the following order: 1) the factoring customer (supplier) delivers the goods and/or the services to the beneficiary (the factoring debtor), according to the commercial sales contract;

3 2) the factor (the factoring company) clenches the factoring contract with the goods supplier (the factoring customer); 3) the supplier, on the base of the factoring contract, submits to the factor the debts of the beneficiary (the factoring debtor), derived from goods and/or services delivery; 4) the factor pays to the supplier the price of the debts, established in the contract and reduced with the interest or the commission for the intermediation of the clearing operations and other expenditures established by clauses to the factoring contract; 5) the factor institutes itself the right to collect the value of the debts from the beneficiary; 6) the beneficiary pays to the factor the equivalent value, on the maturity date established in the commercial contract closed up with the factoring customer [3]. Theoretically, after the accomplishment of these factoring operations, the deltoid relations circuit between the business partners (the supplier, the beneficiary and the factor) ends and the factoring business accomplished its purpose. On the base of the results of the international economical practice, the literature accounts that, factoring, as many other modern financing tools, has its own incontestable advantages, but also some disadvantages. In the following we will detail some of the advantages and of the disadvantages of factoring financing, starting from its main functions analyzed in the literature: financing function; services function; delcredere function [4]. Regarding the financing function, the factoring assures a series of advantages to the supplier (factoring customer), the most important being the following: the immediate conversion of the debts into liquidities (the factoring customer does not have to wait long time for the debt liquidation from his accounting inventory, because they will be transferred immediately to the factor, at the same time with the concluding of the factoring contract, and, therefore, he will quickly collect the equivalent value of those debts with the habitual diminution); the assurance of the necessary liquidities for the business continuance (by clenching a factoring contract appears the possibility to use a financing tool congruent to the turnover of the supplier, accomplishing an enlargement without any problems for him, because these operations assure the necessary liquidities for a proper function of

4 his company). The disadvantages of financing function of the factor can appear, for the factoring customer, only in case of using false payment currency or by wrong financing orders. Regarding the services function, there can be provided a series of services, on the base of the factoring contract, such as: debtors management, debtors accounting, the debtors with maturity exceed formal notice, the control of the debtors solvency, procedure introduction to law courts, enforced debt award. By contracting the services offered by a well-organized and wellestablished factoring company, one creates considerable advantages for the supplier, such as: relief from taxation in the operative activity, material and personnel economy, concentration for the basis activity, immediate and efficient response regarding his business partners which become factoring debtors, etc. In factoring businesses, by the delcredere function, the factor takes over the reability risk of the transferred debts, respectively in the case the debt becomes bad debt because of insolvency or because of payment denial of the debtor, he will not be able to conduct an action in avoidance for the factoring customer. Conclusively, the factors delcredere responsibility, regarding the insolvent debts, represents a guaranteed advantage from the factor for the supplier. At the same time, the factor does not undertake the responsibility for the production risks, which aftereffect the debt quality contracted by the factoring customer. The operating cycle, for any company, completes with the encashment of the value of the delivered products, of the accomplished of the work and of the provided services, a basic stage in assuring the liquidities and the current payment accomplishment without any trouble In Romania, debt encashment form customers, can be realized, besides the classical method of direct payment from the customer, also by other methods, among witch, the credit institutions lately promote the factoring procedure of commercial debts (customers-account and received bills) [5]. According to the governments Hurry Regulation number 10/ , Factoring is a contract established between a party named adherent, goods supplier or services supplier and a banking company or a specialized financial institution, named factor, by which the latter assures the financing, the debt pursuing and credit risks protection, and the adherent submits to the factor the debts from goods sale or services supply, with sale or promissory note. The decision of applying the financing method by means of factoring

5 can not be taken easily due to the cost that it involves. The factoring mechanism implies the availability of a contractual relationship between the commercial debts holders and the credit institutions, which, in return for a factoring commission, ad valorem, estimated upon the value of the transferred/sold debts and in return of a financing commission (the interest taken up by the factor for the amounts paid anticipative to the adherent), estimated prorata temporis, according to the established interest rate, take over the commercial debts, achieving the following operations: collects the bills and the promissory notes from the customers, at maturity; collects the bills and the commercial notes from the customers, even in case of payment incapacity or of bankruptcy; pays, immediately or on a certain date, into the account of the adherent the equivalent value of the invoices, or the largest amount [6]. Although factoring is being used not only by small companies, but also by middle-size companies from almost any activity field, many experts consider one should resort to factoring only after excluding the other short term financing methods, because these kind of credits have a higher degree of risk due to the high costs they involve. When a company analyzes the opportunity of resorting to a credit for financing its debts, it establishes its priorities and necessities regarding the simplification of customer management, the risk coverage of undrawn commercial debts and the assurance of an adequate financial flexibility on one hand, and the effects of an immediate financing of its book debts, on the other hand. Responding to these necessities and priorities, the factor offers at least two from the following services: financing on the base of bills; debts management; debt collecting, on maturity; risk cover for uncollectible receivables [7]. The financing activity on base of invoices (commercial debts) assumes the immediate financing of maximum 80% from the equivalent value of each invoice for the goods delivery or for the supplied services, from which will be subtracted the factors commissions, and the 20% difference will be paid on the invoices encashment date. The activity of debts administration implies the entry in the accounts and the management of the factoring undertaken debts, the individual reflection of the financed bills, of the factors which exceed the ceiling of default payment risk cover, invoices reference which are in balance due at the end of each month.

6 The collecting service involves the pursuit, the encashment at the maturity of the commercial debts and to draw attention, the challenge of those debtors who do not respect the date of maturity. The service of debtors non-payment risk coverage implies that, in case of the risk appears, the factor should cover the equivalent value of the nonpaid debts (20%), mostly in 120 days since the debts maturity. A company can resort to financing by means of factoring only if its debts are documented and if the documents are accepted by the factor. In factoring application practice, in European countries with tradition in this field, if a company can affirmatively answer to the questions like those below, there are a lot of chances for the document to be valid and to accomplish the conditions in order to be undertaken by the factor: Does the company usually grant their customers a payment respite of 30 to 90 days?; Does the company need to keep track of the debtors, to finance its debts and/or to cover the non-payment debtor risk?; Does the company deliver goods or services, in the main, to private and successful companies?; Is the companies debt, in relation to the biggest book debtor of the company, in relation to the 5 biggest book debtors, lower than 30%, respective 60% from the total value of the current debts?; Does the company have revenue and are the assets positive?; Are the invoices written only after the goods are delivered and/or the services are supplied 100? [8]. Usually, factoring applies to the companies which are interested in production and turnover growth, which resort to the pursuing of the debt encashment, to debt collecting and to non-payment risk coverage at specialized institutions. In consequence, in distinction to bank credit, which offers only financing, factoring involves a multitude of services (financing, pursuing, collecting, and protection to risks). For credits there also the accent of the analyses appears to be on the applicants reliability, while factoring involves, first of all, the analyses of the reliability of the applicants partner (adherent). Conclusively, we consider that factoring is an answer, most of all, to the need of financing of the companies, indifferently of their size, and it allows their beneficiaries to obtain the necessary financing amount for their development. Much more, if we consider the fact that, according to some statistics the level of book debts recovery does not pass 85%-90%, so the use of factoring in Romania can considerably minimize these kinds of losses.

7 References [1] Molico, T., Wunder, E., Factoring: a modern tool for liquidities assurance in the functional market economy, in Business accounting, value and audit Magazine, number 6, July 2005, p.41 [2] Molico, T., Wunder, E., Factoring, a modern financing alternative, Bucharest, CECCAR Publishing House, 2004, p.12 [3] Ibidem, p.14 [4] Ibidem, pp [5] Dumbravă, Partenie, Ciubotaru, Cornel, Factoring offset method of companies debts. In: Public finance and accounting Magazine, number 1/2005, p.8 [6] Ibidem, p.9 [7] Mihai, Ilie, The technique and the management of banking operations, Bucharest, Expert Publishing House, 2003, pp [8] Dumbravă, Partenie, Ciubotaru, Cornel, cit.ed. p.12