Introduction. Functions of Factoring

Transcription

1 Doprava a spoje elektronický časopis Fakulty prevádzky a ekonomiky dopravy a spojov Žilinskej univerzity v Žiline, ISSN FACTORING AS A TOOL FOR ENHANCING THE COMPETITIVENESS OF IN TRANSPORT ENTERPRISES Miloš Birtus 1, Tomáš Klieštik 2 Introduction The dynamic development of business is one of the fundamental assumptions of healthy economic development of the country. Enterprises need for their development and success in today s highly competitive environment in addition to sufficient financial resources for the business itself also to offer its business partners additional benefits. It offers a relatively wide range of possibilities. One of them is to provide the best possible payment terms, i.e. opportunity to provide its customers commercial loan. It often becomes that the enterprise is waiting for payment for goods delivered two, sometimes several months. For such long maturities are becoming increasingly difficult to maintain an adequate levels of funds. Especially in such cases, the enterprise must react promptly and reinforce operational capital of foreign resources. Enterprises go to the help from banks most often (for example, in the form of overdraft). And that the banking sector fulfils its role effectively needs a clearly defined rules and welldefined framework, which will be given to its activities. Another of the possibilities of business financial support is the use of the services of the factoring company; which is not yet so common. Enterprises are linked to the factoring financing as a last resort as to avert bankruptcy. Functions of Factoring Undoubtedly, a very significant task carried out by factoring, is overcoming the barriers to international trade, blurred the differences, such as cultural, language and legislative differences, but also the differences arising from different business practices. Together with forfaiting is among the most used alternative methods of financing. Among the basic functions of factoring include: 1 Ing. Miloš Birtus, PhD., Katolícka univerzita, Pedagogická fakulta, Katedra ekonomiky a cestovného ruchu 2 doc. Ing. Tomáš Klieštik, PhD. University of Zilina, Zilina, Univerzitná 1, Slovakia tomas.kliestik@fpedas.uniza.sk 45

2 1. The function of the guarantee and insurance results from the most common forms of factoring, i.e. the one without recourse, and it is one of the most frequently mentioned functions of factoring. The factor assumes also the risk of default, whether by reason of the customer insolvency or of his payment resentment. 2. Function of financing it may be said that this is a function that ranks factoring among the popular financial services. After dispatch of goods and invoice with the assignment clause and after submission of its copies to the factor, the seller receives immediate funds amounting to 70-90% of the invoiced prices for further business operations. The amount of the percentage is derived from seller s reliability, and also from the nature and quality of its products, level of commercial service etc. 3. Administrative function it is actually about the rights arising from receivables. Factor manages the administration of matters associated with the payment of receivables, dunning of the customers (debtors) and also recovery of the outstanding receivables. Together with the change of ownership, the receivable is also being transferred in terms of accounting which means that the accounting regarding receivable is being held by factoring company and its client administrates only receivables towards factor. 4. Information function this function is a secondary but no less important. Prior to conclusion of factoring agreement, the factor usually carries out analysis of data and information concerning the seller, so he could better provide for his services. This information concerns in particular the structure of the receivables portfolio, average period of their return, potential risk clients or contracts, legal form of the receivables, the turnover of the seller or the possibility of other forms of security of receivables 3. He also provides seller with the information concerning financial situation of its customers. 5. Strengthening of competitiveness - client of factoring company increases his competitiveness not only by providing the possibility of extending credit to his customer but also by not securing the receivables by the other instruments, thus virtually levelling himself as domestic seller. We are able to say that factoring is 3 SATO, A.: Aktuální otázky mezinárodního obchodu. Faktoring alternativní možnost pro financování podnikatelské činnosti v zahraničním obchodě. 2001, p. 5 46

3 Doprava a spoje elektronický časopis Fakulty prevádzky a ekonomiky dopravy a spojov Žilinskej univerzity v Žiline, ISSN becoming one of the least expensive ways of how to compete with other competitors. Factoring Costs Of course, factoring services are being provided for consideration. Cost analysis of the factoring services can be done only at the basic level 4. The main determinants of factoring costs are the number and average value of the invoices. In general, there is a principle that for factor it is more favourable to manage fewer receivables with higher value than more receivables with lower value, and an important factor is the associated workload. The costs associated with the use of the services of factoring company may be divided into three groups: 1. factoring fee, 2. financial cost, 3. risk premium. Factoring fee takes into account costs of factor which are incurred in relation to verification of the client and its customer, processing and administration of receivables, delivering dunning and the overall administrative burden. A particular amount of the fee is based on the assumed volume of the financed operations, the expected workload and administrative complexity. It ranges approx. up to 1, 5% of the volume of assigned receivables. Financial costs represent in particular interest rate for funds provided in the form of advances. It approximately equals to the rate applied by commercial banks when providing short-term loans. The interest is calculated for number of days since the advance was transferred to the seller s account, until the moment of actual payment of customers to factor s account. The interest rate ranges approximately at the level of interest rates for which banks offer short-term overdraft. For example, the factoring company will charge a rate of 1M EURIBOR 5 + 2% p.a. 4 Reason for this is the fact that the factoring companies are operating in competitive environment and therefore they publish only basic informative rates. 5 EURIBOR is an interbank offered rate within economic and monetary union, which was implemented in Offered interest rate of Member States of Eurozone is being fixed daily in Brussels at am local time. It is being calculated as an average value of daily quotes of selected 57 banks of Eurozone. It is being quoted on basis of 360days, rounded for 3 decimal places. 47

4 The risk premium takes into account the fact that the customer, the debtor of factoring company, will not be able or willing to pay his commitment. It should include the costs associated with the recovery of the receivables, default interest and total additional administrative costs. Amount of the risk premium depends mainly on the creditworthiness of the customer and on the type of factoring. Its amount is determined by risk manager on the basis of creditworthiness verification, his previous cooperation with seller, payment morality, etc. The real costs and the amount of the interest charges depends mostly on many other facts, which may be: potential turnover of factoring companies, the use or non-use of refinancing, the structure of the customers, their number and the history of relations with them supplies shipment region strategic position of the customer (e.g. possible long-term growth) etc. International factoring Factoring chains represent the chain of factoring companies whose aim is cooperation, making factoring known to public and strengthening their positions on market. In the past these chains focused mainly on introducing international factoring to countries where this service was not available. The most well-known and biggest factoring chains are Factors Chain International (FCI) and International Factors Group. Factors Chain International was founded in 1968 and its aim was to represent interests of independent factoring companies all around the world and today it represents the biggest chain of companies involved in this type of financing. There are 247 factors from 66 countries and their factoring transactions represent 80% of world international factoring. The main role of FCI is to become the worldwide standard for international factoring with the help of global network of factoring companies, modern communication systems, worldwide promotion of factoring and market flexibility. The basic FCI philosophy is to create competition among its members but at the same time maintain standard level of 48

5 Doprava a spoje elektronický časopis Fakulty prevádzky a ekonomiky dopravy a spojov Žilinskej univerzity v Žiline, ISSN services. FCI members are thus allowed to adjust the services they offer to local demands as the chain feels it is important to respect local customs and habits while keeping the global negotiation codex. The following table shows the worldwide factoring since Table 1: Worldwide factoring volume in millions EUR Europe Americas Africa Asia Australasia WORLD Picture 1 shows the structure of the worldwide factoring in As we can see, 61% of debts sale through factoring takes place in Europe. Then there is Asia with 25% and America comes third with 10%. This proportion is more or less the same also for previous years. Picutre1: Worldwide factoring division in continents 2011 Table 2 shows the development of factoring between the years 2005 and 2011 in particular European countries. The United Kingdom is clearly the leader. But Slovakia, taking into account its size and economy force, holds a relatively good position when compared to similar countries. (see Pic.2) 49

6 Table 2: Factoring in Europe in millions EUR Austria Belgium Bosnia Bulgaria Croatia Cyprus Czech Rep Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Norway Poland Portugal Romania Russia Serbia Slovakia Slovenia Spain Sweden Switzerland Turkey Ukraine United Kingdom Total Europe

7 Doprava a spoje elektronický časopis Fakulty prevádzky a ekonomiky dopravy a spojov Žilinskej univerzity v Žiline, ISSN Factoring in the Slovak Republic Factoring in Slovakia is starting to find its place and thanks to better awareness of business community it is becoming more and more popular form of financing. The volume of debts refinancing through factoring had a tendency to rise from EUR 830 millions in 2005 to millions in Then, as a result of the financial crisis, it dropped to EUR 981 millions in 2010 but then the following year it started to rise again. The forecast is positive even though the increase in the volume of factoring will not be as intense as in the years before the crisis. Picture 2: Factoring volume development in Slovakia in millions EUR The organisation that factoring companies in Slovakia is called the Association of factoring companies. It was founded in 2003 and its aim is to support, assert and defend interests of factoring companies. It also aims to improve the position of factoring in the product scale of corporate banking. In 2008 there were 8 members. The Association also keeps statistics of its members factoring volume. The following picture shows the structure of factoring in

8 Picutre 3: Structure of factoring in Slovakia in 2011 The graph shows that the biggest share of the total refinanced debt volume in Slovakia in 2011 is held by Tatra banka. Advantages and Disadvantages of Factoring The advantages and disadvantages of factoring differ within its forms; therefore it is important that the client should consider which type will suit him the most. From the perspective of seller, among the basic advantages of factoring belongs: Prompt receivables collection mostly, within two days seller obtains the majority of amount, sometimes up to 90% of the value of assigned receivables, increase, accelerating the company s cash flow the fact that the seller has not the substantial part of funds allocated in receivables, turnover of operational capital and cash flow accelerates, protection against the risk of customer s insolvency in the case of factoring without the recourse, the factoring company assumes all risk arising from the customer s insolvency, possibility of financing the seasonal peaks and other fluctuations, simplification and improvement of the revenue prediction from sale of products and services, because it is not necessary to incorporate the parameters of customer s behaviour into the prediction models, financing other development projects, 52

9 Doprava a spoje elektronický časopis Fakulty prevádzky a ekonomiky dopravy a spojov Žilinskej univerzity v Žiline, ISSN reducing costs (administrative, recovery costs, FX losses, etc.), improving the indicators of financial analysis, i.e. obtaining cash resources, without increasing the debt burden of company. On the other hand, it should be noted that factoring includes some issues and disadvantages, for example: Relatively high factoring costs compared with short-term bank credit, i.e. the cost associated with factoring reduces the company profit the need to achieve a minimum annual turnover, the factoring becomes unreachable especially for small and medium enterprises rights or claims of third parties towards receivables may not exist, personal relationship between seller and customer is unacceptable, the contractor must have a certain history, i.e. emerging companies have hindered access to factoring, Factoring contract is quite often negotiated for definite period of time; therefore sometimes it is difficult to discontinue cooperation with factoring company. It may occur that the company will have to assign receivables to the factoring company even though it will not be beneficial for him, In Slovakia, there is low level of awareness about factoring. Therefore, information about using of services of factoring company may sound as enterprise has limited credit opportunities and that nobody, except the factoring company, wants to grant credit. Conclusion Financing of the international trade assumes an informed decision on how to obtain the necessary funds with regard to undertaken risk. When choosing a method of financing, company decides for example according to the amount of funds that can be obtained, according to the amount of costs which are associated with various financing alternatives, according to the risks which company bears, according to the speed of obtaining the funds and flexibility of their use, etc. This means that method suitable for one company may not necessarily be optimal for other. 53

10 Factoring is suitable mainly for the sellers who provide short-term credits with a maturity of up to 90 days to the relatively stable range of customers. The same applies to forfaiting, but maturity is longer, in some cases it may be eight (8) years. This period means a considerable risk for forfaiting company; therefore the assignment of receivable is secured with bank guarantee in the form of aval or another security instrument. It should be stressed that although factoring and forfeiting is not suitable for all entities and its nature remains and probably will remain an alternative way of financing of the trade, its role in international trade continues growing. At the international level, factoring is adjusted by a number of significant legal documents such as the UNIDROIT Convention on international factoring, United Nations Convention on the Assignment of Receivables in International Trade, etc. Acknowledgements The article is an output of scientific project VEGA 1/0357/11 Klieštik, T. and col.: Research on the possibility of applying fuzzy-stochastic approach and CorporateMatrics as tools of quantification and diversification of business risk. References [1] BREALEY, R. A. MAYERS, S. C.: Teorie a praxe firemních financií, CPRESS, Praha 2000, [2] MACHKOVÁ, H., SATO, A., A KOL.: Mezinárodní obchod a marketing.: Grada publishing, Praha 2002 [3] VINŠ, P. LIŠKA, V.: Rating, C. H. Beck, Praha 2005, [4] [5] [6] [7] Referee: prof. Ing. Štefan Cisko, CSc.,University of Žilina. Enter to publishing: 30 th October