Vital Factors

International trade is not only an opportunity for financial rewards; it is in most countries a key element in the health of an economy. Domestic-oriented companies are encouraged to export; experienced exporters are encouraged to export even more.

Foreign importers, however, have become used to sourcing from different suppliers in different countries. This development has introduced an extra element of competition, which for many exporters is a new reality.

Exporters around the world have been attracted to factoring by the need for increased security when seeking foreign buyers, and the benefits of local market knowledge and the credit information and collection services that form such an important feature of the two-factor system.

OPEN ACCOUNT TRADING

There is nothing complex about factoring. It is simply a unique package of services designed to ease the traditional problems of selling on open account.

Typical services include: investigating the creditworthiness of buyers; assuming credit risk and giving 100% protection against write-offs; collection and management of receivables; and provision of finance through immediate cash advances against outstanding receivables.

International factoring services have been available since the 1960s, but it is only in the last ten to 15 years that the service has become available in the majority of developed and emerging markets. Undoubtedly, Factors Chain International has played an instrumental role in introducing both international and domestic factoring to new markets.

In the early days, every country was a 'new' market, as factoring was exclusively found in the US and Canada until its first expansion towards Western Europe in 1962. Today, 'new' markets include countries like Lebanon, Vietnam, Egypt, Ukraine and El Salvador.

TAIWAN WORLD LEADER IN FACTORING

Taiwan is presently the world's biggest user of export factoring services, offered by 16 local FCI members, and international factoring is used in a host of industries. A Taiwanese bicycle manufacturer, Meridia, linked up with Chailease Finance Company in 1996 and utilised the FCI international factoring system to provide protection against bad debts that had previously been covered by credit insurance policies.

One effect of this was that the firm had access, through correspondent factors in its foreign target markets, to better credit information on buyers. The company's close relationship with Chailease helped it to find and trade with clients who have a good track record of payment.

WHAT DO FACTORS DO?

When export factoring is carried out by members of FCI, the service normally involves a six-stage operation.

The exporter signs a factoring contract assigning all agreed receivables to an export factor. The factor then becomes responsible for all aspects of the factoring operation. The export factor chooses an FCI correspondent to serve as import factor in the country where goods are to be shipped.

The import factor investigates the credit standing of the buyer of the exporter's goods and establishes lines of credit. This allows the buyer to place an order on open account terms without opening letters of credit. Once the goods have been shipped, the export factor may advance up to 80% of the invoice value to the exporter.

Once the sale has been communicated to the import factor, the import factor collects the full invoice value at maturity and is responsible for the transmission of funds to the export factor who then pays the exporter the outstanding balance.

If, after 90 days past the due date, an approved invoice remains unpaid, the import factor will pay 100% of the invoice value under guarantee.

SINGLE FACTORS

In some situations, FCI members handle their clients' business without involving another factor. This is becoming more common in the EU where national boundaries are disappearing.

However FCI members conduct their business, their aim is to make selling in the complex world of international trade as easy for clients as dealing with local customers.

FACTORING IN CHINA

As is the case in nearly every industry today, factors are also focused on that one country the entire world is watching: China. China is an ideal laboratory for factoring, as it is the world's fastest growing economy, dependent on exports to generate economic growth, and after having joined the World Trade Organisation, a market where step-by-step foreign expertise will mix with local know-now.

Factoring turnover tripled during the past three years to €6bn in 2005, with a substantial 30% of that value in international factoring. It is clearly still very early days for the Chinese factoring market, which has only 12 participants at the moment, all members of FCI, but with an additional number of banks trying to join the bandwagon.

The main focus in China, certainly for domestic business, is on finance. With the exclusive involvement of banks as dictated at present by the China Banking Regulatory Commission (CBRC), there is, at times, a suspicion that some of the volumes reported relate more closely to traditional bank facilities than to factoring.

Moreover, contrary to the situation in most other countries, factoring is almost exclusively offered to large companies with perceived low client risk. The average invoice value is high and the number of factored debtors is low.

The breakthrough will come with the establishment of the first true factoring company, or at least a quasi-independent factoring department of a bank, with its own management structure, its own credit criteria and client acceptance policy. Only then will factoring develop and be recognised as a service-oriented industry, capable of providing working capital finance to the most promising sector of the Chinese market, the privately owned SMEs.

BANKS MUST DEVELOP KNOW-HOW

No other country offers as much potential for export factoring. For many foreign factors interested in the Chinese market, the export sector is seen as the most interesting area. But the market will only be able to flourish if local banks drastically increase their factoring professionalism.

So far, local Chinese banks, despite their involvement, have been slow in building the kind of real factoring expertise that can now be found in neighbouring countries, such as Japan, Hong Kong and Taiwan.

Nevertheless, since 1992, Bank of China's factoring unit has developed an export factoring portfolio which is now among the biggest of all FCI members. Ongoing exports to nearly 30 countries are now being factored.

It underlines that today's conditions in China have drastically changed, giving rise to the expectation that in ten years' time China will be the largest user of export factoring services in the world, and therefore one of the most important member countries in the FCI network.

CASE STUDY 1: A WHEEL MANUFACTURER IN TURKEY

The trend towards open account trading, prompted in part by increasing flows of trade from developing markets to developed ones, has raised exporters' awareness of the need to mitigate potential risks. This was one of the key motivators that introduced Turkey's CMS Group, a manufacturer of light alloy automobile wheels, to the benefits of factoring.

CMS, the Turkish market leader in its field, got together with Koc Faktoring and Yapi Kredi Faktoring in 2000. Tonguc Olsen, creator of the CMS brand, says this decision prompted a growth in exports: "The export factoring facility allows us to focus on our core business, as well as our philosophy, which requires dedication to continuous improvement."

In 2000, CMS, whose clients include Renault, Fiat and Alfa Romeo, produced 1.5 million wheels, 80% of which were exported to markets including Germany, the UK, Portugal, Egypt, Denmark, Holland and Russia. Production has gradually increased to a capacity of 3.5 million wheels a year in more recent years.

CASE STUDY 2: A WINE GROWER IN CHILE

In the case of Cremaschi Furlotti, a young but successful Chilean wine producer, one of the big attractions of factoring was that it overcame the reluctance shown by some of the firm's customers in overseas markets to work on a letter-of-credit basis, a growing difficulty in competitive industries where buyers wield considerable power.

Cremaschi, which started exporting in 1996, saw its trading volumes soar after it linked up with local FCI member FactorLine in 1999.

From first-year sales of around $500,000 in 1998, factoring helped Cremaschi boost exports to ten times that amount. Cremaschi now exports to 18 countries, including Canada, the USA, the UK, Germany, Brazil, Mexico, Thailand, Hong Kong, Malaysia, China and Japan.

According to company president Pablo Cremaschi Furlotti, the combination of credit protection, collection and working capital enabled the company to increase its exports with confidence and spend more time focusing on wine quality, bottling and sales.