Factoring and customers needs Evidence from a new survey in the Italian market IFG GM Club 2009 Milan, February 5th 09 Massimo FERRARIS, General Manager Ifitalia and VP Assifact James MUGERWA, CEO GE Capital Finance Spa and Board Member Assifact 1
Agenda The survey on factoring demand by SDA Bocconi Business School The use of commercial credit How enterprises see factoring The use of factoring The level of satisfaction in the factoring relationship Factoring and business management The debtors point of view Factoring and Basel 2 Factoring and IAS Conclusions and perspectives 2
The survey on factoring demand by SDA Bocconi Factoring is a tool well known and widely used in economic and financial systems. Factoring market has been growing all over the world steadily and significantly for many years. Italy is one of the most important factoring markets in the world. Despite the world-wide relevance of factoring, there are only a few studies regarding the characteristics of factoring demand. In 1996, the Italian Factoring Association (Assifact) conducted an important survey on the characteristics of factoring demand (AF 1996). In particular, the survey focused on: the perception and evaluation of the product characteristics, the relationship with the banks and the factoring companies, the effects of factoring use on the enterprise management and finance. After twelve years, the Research Department Claudio Demattè of SDA Bocconi Business School, on behalf of Assifact, has returned to this topic (SDA 2008), with the aim to better define the most relevant profiles of factoring use by Italian enterprises. 3
The survey on factoring demand by SDA Boconi Survey questions: What do Italian enterprises think of factoring? How do Italian enterprises use factoring and how do they evaluate its convenience? What are the reasons of satisfaction or dissatisfaction in a factoring relationship? What are factoring perspectives with regard to the new IAS/IFRS and Basel 2 scenarios? 4
The survey on factoring demand by SDA Bocconi The sample The sample was composed of 100 enterprises with different features. The sample can be considered to be representative of the actual and potential customer base of the factoring market. PRIVATE NON FINANC. 49% Sample by industry sector CENTRAL BODIES/ENTITIES 2% LOCAL BODIES/ENTITIES 3% STATE/GOVERNEMENT BODIES/ENTITIES 2% MANUFACTURING 37% BUILDING 7% The main features of the sample were: enterprises date of establishment in a wide range (from 1831 to 2007); on the average, enterprises older than the ones of 1996 survey; 43% of enterprises with less than 100 employees; 88% of enterprises with mainly domestic turnover (min. 200.000, max. 30 billions); 35% of enterprises with seasonal turnover. 5
The use of commercial credit Commercial credit mainly represents a way to fund the customer and a strategy of sales expansion; it also contributes to match incoming and outgoing flows. What does business credit represent? a way to fund the customer 25% other 5% No opinion 2% a guarantee of the product s quality 7% a strategy of Sales expansion 19% a tool to establish a lasting relationship with the counterpart 15% a way to match incoming/outgoing flows 19% a tool to assess reliability of the counterpart 10% 6
The use of commercial credit Main issues: payment delays; high costs in credit management. What are the main issues in the use of business credit? 39% 40% 35% 30% 25% 20% 18% 22% 17% 15% 10% 4% 5% 0% Customers insolvency High payment delays from customers High costs in credit management Difficulty to assess the counterpart Other 7
How enterprises see factoring A comparison with the results of the 1996 survey clearly shows a greater awareness of the service components of factoring (risk protection and credit management facilities). What does factoring represent? A source of funding, alternative to bank loan Survey SDA 2008 A source of funding complementary to bank loan 26% A guarantee against debtor s insolvency 25% A tool for professional credit management 19% 16% A way to recover bad debts 7% Other 6% No opinion 1% 8
How enterprises see factoring Answers by turnover ranges (< 25 over 250 Mln Euro) 35% 30% 25% 20% 15% 10% 5% What does factoring represent? (by turnover ranges) < 25 Mln 25 250 Mln over 250 Mln The higher the users turnover, the less factoring is perceived as a mere source of funding and the stronger is the perception of factoring service components (risk protection and credit management facilities) 0% 1 2 3 4 5 6 7 1. a source of funding alternative to bank loan 2. a source of funding complementary to bank loan 3. a guarantee against debtor s insolvency 4. a tool for professional credit management 5. a way to recover bad debts 6. other 7. no opinion 2008 survey confirms the results of 1996 survey 9
The use of factoring The sample enterprises have been using factoring as follows: almost 50% has been using (or used) factoring for over 5 years; 32% has been using (or used) factoring for less than 3 years. A comparison with the results of the 1996 survey shows an evolution in the duration of the factoring relationships: factoring tends to be used for longer periods of time and more regularly. If you are (or were) a factoring customer, how long have you been using factoring? 40% 35% 30% 25% 20% 15% 10% 5% 0% 32% 37% 14% 26% 27% 23% 26% 1 2 3 4 5 1. 1 3 years 2. 3 5 years 3. 5 10 years 4. More than 10 years 5. Since the company was born 9% SDA 2008 AF 1996 5% 1% For large enterprises factoring Is a valuable business tool: 50% has been using (or used) it for over 10 years. Factoring relationships tend to be of longer duration also for enterprises which: regularly use factoring; significantly use commercial credit. 10
The use of factoring Among the sample enterprises: 45% have a business relationship with only 1 factoring company; 41% have a business relationship with more than 1 factoring companies ( from 2 to 4); 14%, mostly large enterprises, have a business relationship with more than 4 factoring companies; 71% of the experienced customers have business relationships with more than 1 factoring companies; the less experienced customers (57%) prefer to have only one factoring relationship. How enterprises get acquainted with factoring 40% through direct contacts with a factoring company; 27% through banks (in particular small enterprises); A comparison with the results of the 1996 survey shows a lower relevance of banks as promotion vehicles for factoring. 7% gained knowledge of factoring through enterprises which already used it; 26% (in particular large enterprises) gained knowledge of factoring through other sources, mainly direct knowledge or previous experience. 11
The use of factoring The reasons for using factoring The use of factoring is mainly due to liquidity requirements (36%), strong growth of the business (21%) and necessity to cover the risk of debtors insolvency (17%). Your company adopted factoring, because Outsource the credit management 10% A guarantee against debtors insolvency 17% Recover unsettled invoices/bad debts 6% Cash 36% Increased growth of the business 21% Reduction of bank loan 9% 0% 5% 10% 15% 20% 25% 30% 35% 40% Customers which occasionally use factoring tend to consider more important credit risk coverage (30%). 12
The level of satisfaction in the factoring relationship The level of satisfaction in the factoring relationship is considered: good by 62% of surveyed companies excellent by the 15% sufficient by the 20% poor only by the 3% of companies, but this % is higher among former customers (14%). Level of satisfaction in the factoring relationship 80% 70% 60% 50% 40% 30% 20% 10% 0% 72% 50% 39% 19% 9% 7% 4% 0% poor sufficient good excellent Occasional factoring users are less satisfied than those who use factoring systematically. Occasional users Systematic users 13
The level of satisfaction in the factoring relationship Main reasons for satisfaction Speed and certainty of funding times Guarantee against debtor s insolvency Factor s experience in credit management Possibility to assign the entire customers portfolio Automatic financing of the sales growth Cost Main reasons for dissatisfaction Only some customers may be assigned Unefficient management services Internal costs of credit management do not decrease significantly Debtors do not like to pay via the factoring company Main reasons for abandoning factoring (former customers) Lacking/Dissatisfying insurance services against debtors insolvency Cost No significant reduction of internal costs of credit management Low amount of funding (%) 14
The level of satisfaction in the factoring relationship Those who rate factoring being more expensive than bank loan consider that it is a more complex and complete service (about 41%). Only a minority think that factoring mainly serves companies that face financial weakness (5%). Although, opinions significantly differ among business categories. Why does factoring cost more than bank loan? Factoring is a more complex and complete service than bank loan Factoring companies usually serve customers facing financial weakness/troubles Customers Former Customers Non users 45% 29% 35% 3% 14% 9% 15
The level of satisfaction in the factoring relationship Most of surveyed companies consider that the cost of factoring has to be compared with the average cost of financing and the internal cost of credit management (53%) or, but less frequently, with the cost of bank loan (33%). From the 1996 AF survey to the 2008 SDA survey, the perception of factoring evolved into an integrated system of financing and services. In the same way, also the costs evaluation has evolved: internal credit management is taken more into account when assessing costs. 16
The level of satisfaction in the factoring relationship The cost of factoring should be compared with: Expert Users Less expert Users Occasional Users Systematic Users The cost of bank loan 26% 43% 57% 23% The cost of supplier credit 9% 7% 4% 9% The average cost of financing and the internal cost of credit management 56% 43% 28% 63% Other 9% 7% 11% 5% More expert and systematic users are more likely to evaluate factoring costs in comparison with the internal costs of credit management. 58% of users dissatisfied from factoring cost are more likely to compare it with bank loan cost. 17
Factoring and business management From a financial standpoint factoring mainly enables users to optimize the collection planning and, less frequently, to solve temporary or chronic financing needs. From a financial standpoint, factoring enables your company to: Increase turnover growth 8% Other 7% Solve chronic financing needs 19% Optimize collection planning 48% Solve temporary financing needs 18% 18
Factoring and business management From a financial standpoint, factoring enables your company to: Small Enterprises Medium Enterprises Large Enterprises Solve chronic financing needs 31% 15% 12% Solve temporary financing needs 26% 18% 6% Optimize collection planning 39% 43% 70% Increase growth of turnover 4% 9% 12% Other 0% 15% 0% The larger is the enterprise, the more frequently factoring is considered as a tool to optimize cash flows planning. The same is for more expert and more satisfied users. 19
Factoring and business management Factoring customers use advanced funds: mainly to refund their dues less frequently to finance sales growth (mainly among expert users and medium enterprises) rarely to be invested. 82% of surveyed companies with a well developed use of commercial credit, if compared with competitors, use advanced funds to refund their dues. Compared with the past, the % of companies investing in sales growth has decreased (19% in 08 vs 36% in 06) the % of companies using finance to refund their dues to suppliers or banks has increased 20
The customers (debtors) point of view Surveyed companies believe that: their suppliers use factoring mainly because they need cash (50%) assigned customers (debtors) consider turnover assignement like something usual in the business management (38%) or like a disturbing event in the relationship with the supplier (31%). Debtors consider turnover assignment to a factor/bank like: Evidence that the supplier takes care of credit management and cash flow planning 11% Evidence of financial weakness of the supplier 15% A disturbing event in the relationship with supplier 31% other 5% something usual in business management 38% Lower % of those believing that debtors see turnover assignement like: an evidence of supplier s financial weakness (15%) an evidence that the supplier is taking care of credit management and cash-flows planning (11%) 21
Factoring and Basel II 32% of surveyed companies believe that their standing towards financial partners and lenders will be strenghtened (mainly for small enterprises); 47% believe it will remain unchanged. Companies expect to increase their equity (25%), to enrich the company information available for their lenders (23%) and to focus on selection of their customers. Almost half of them believe that, in the Basel 2 perspective, factoring companies assess customers differently from banks (63% of large enteprises). 58% believe that factoring may improve the company standing towards lenders because it reduces debts, it improves the financial structure and treasury and it helps the business growth by boosting the working capital. This may result in an increased use of factoring by enterprises (20%). 67% of factoring systematic users (vs 46% of occasional users) believe that using factoring may improve their standing towards lenders, mainly because of its positive effects on working capital and business growth. 22
Factoring and IAS Only 1/3 of companies have a IAS compliant balance-sheet. Among them only a few perceive a different behaviour of lenders (24%) in terms of quantity, costs, timeframes, guarantees. For 57% of surveyed companies, IAS have added complexity to accounting and fiscal processing, but have improved the way to express the business value (69% have registered positive effects of new accounting standards on balancesheet). 63% of IAS compliant companies interviewed identify the factoring benefits related to the derecognition off balance-sheet: it improves balance-sheet ratios and financial standing. 70% of large IAS compliant enterprises believe they get benefits from the derecognition, while smaller enterprises have a lower perception of it (50%). 71% of commercial credit users believe they can get benefits with lenders thanks to the credit derecognition off balance-sheet. 23
Conclusions and perspectives For 66% of surveyed companies, the use of factoring is expected to grow further (vs a less optimistic 46% of companies surveyed in 1996). Factoring systematic users (84%), satisfied users (90%) and commercial credit users (84%) are more inclined to forecast a further development of factoring. 97% of current users intend to continue the factoring relationship in the future. More than 1/4 of non users intend to start a factoring relationship in the future, mainly as guarantee against debtors insolvency. More experienced and non occasional users clearly understand factoring benefits and peculiarities and show to use it correctly as a tool. Some prejudices and clichés on factoring still exist instead, mainly among less experienced users, who use factoring rarely (and badly). On-going information and education are needed to help enterprises to fully understand the multiple capabilities and benefits of the factoring tool. Surveyed companies, nevertheless, are aware that factoring is a financing tool to support working capital. More frequently companies appreciate factoring as a credit management tool. 24
Thank you for your attention. Massimo FERRARIS General Manager, IFITALIA Vice President Assifact James MUGERWA CEO, GE Capital Finance Spa Board Member Assifact 25