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Roundtable | Factoring as a Crisis-proof Financial Tool
Roundtable | Factoring as a Crisis-proof Financial Tool “Europe’s Zombie Problem has only gotten Worse”

“Europe’s Zombie Problem has only gotten Worse”

So proclaimed a May 2021 article in The FT reflecting concern from the ECB. The article highlighted how unprecedented levels of government intervention gave artificial life-support to many potentially unviable companies and the risk posed as that unwinds. As Factors, we have a vital role in helping clients manage risk and protecting the seller from the inability to pay. In this discussion, we explore the relevance of factoring in times of crisis and hear from panellists how it’s playing a critical role through providing liquidity, supporting adaption of supply chains, and managing risk. The panel also share their digital transformation experience and their thoughts on both the importance of innovation and industry standards.

  • John Beaney (JB), Director, HSBC GTRF, was in conversation with:
  • Brendan du Preez (BdP), Group Head Supply Chain & Working Capital Finance, Standard Bank, South Africa
  • Eric Lu (EL), Senior Vice President, CTBC Bank, Taiwan
  • Maria Luisa Muñoz (MLM), Head of Transaction Banking, Bancolombia, Colombia
  • Roberto Weckop (RW), Director & Head of International Business, Deutsche Factoring Bank, Germany

 

JB: Our theme is “factoring as a crisis-proof financial tool.” Do you agree with the premise, and why?

RW: The moment of truth regarding the benefits of factoring is, in my opinion, happening, especially in risky times. Then Factors can prove that they still supply cash-flow while protecting their clients (and in FCI, their Factoring correspondents) against bad debts. Let me give you an example: Importers in many markets were asking for longer payment terms to cope with the massive decline in demand caused by lock-downs and further restrictive measures. At the same time, payables from their suppliers became due. Factors helped to cover these increasing risks and secured liquidity by prolonging receivable tenors and accepting bearable repayment agreements. The often underestimated third benefit of factoring (besides fast liquidity and risk assumption), the professional receivables management, was more in demand (especially with exports). Factoring clients could maintain the business relationship with most of their customers by offering more flexible business terms. But corporates in fast-growing industries (e.g. healthcare, food, electronics, e-commerce, household goods) had more demand for SCF solutions. The value of the collateral A/R increased and provided risk underwriters with more comfort.

EL: The rising demand for factoring services among SMEs worldwide can be attributed to the shortage of working capital. Several industries find it difficult to sustain as they receive their payments late and their receivables on the balance sheet continue to increase. Thus, factoring has been of critical importance for such companies to avoid financial constraints. Factoring is also an effective way for clients to operate a credit facility with financing based on the validated collateral of the invoices; banks are thus more comfortable supporting credit lines than without such good security. During the pandemic, many SMEs face challenges to get sufficient working capital as banks are de-risking their portfolios or changing their risk appetite. Factoring can be an effective solution to secure timely financing for those SMEs.

MLM: It’s already been fourteen months since the COVID pandemic has arrived in Latin America and has many challenges and learnings. The financial sector has played an important role in maintaining the economic flow, specially Factoring and Payables Finance facilities which gave suppliers and buyers the possibility to improve their supply chain movement. From a Latin American financial view, this difficult time made a lot of changes to efficiency priorities. The cost of merchandise purchased is no longer the only reason to buy or select a supplier. As the disruption in supply chains happened and is expected to happen more frequently, resilience and flexibility in supply chains are now the main issues, and this made many players focus on strengthening good relations to assure supply, making Payables Finance and Factoring an important tool.

 

JB: Early in the pandemic, there was a squeeze on dollar liquidity. How did you manage?

MLM: As this happened, customer priorities changed and started to be focused upon demonstrating immediate liquidity, and this meant that banks did have to allocate disbursements to short-term credit and reduce client risk, making a perfect combination for Payables Finance and Factoring to be prioritised. Bancolombia did reinforce its past strategy of supporting the supply chain and trade flows of its customers. With liquidity being reformed, factoring transactions took first place for customers, which helped supply chain resilience and flexibility for Colombian importers and exporters.

 

JB: Talk about the move from paper to digital communication with clients?

BdP: From our perspective, we saw a more collaborative model evolving, i.e., bank and SCF specialist fintech collaborate to bring added value in support of client ecosystems. In the times we find ourselves in, it is even more pronounced. As the wider industry moves to a more digital means of executing commerce, digital will become the way of life. In the context of SCF, digital data exchange is already embedded as part of the solution set, with one caveat being the considerations around regulatory requirements where certain underlying document sets may still be required, especially across the border, while specific SCF local market solutions are digitally driven.

EL: Features offered to our clients are major decisive factors when it comes to factoring services. Their considerations are credit limit, factoring fee, advance interest, and handling charges. Nonetheless, it is also important for a bank to have a user-friendly, intuitive portal for clients to check the balance, assign invoices, and apply requests for financing when needed. Clients will choose banks that use the latest, fast, and dynamic digital technology to solve their problems, to help to streamline their internal processes, and easily exchange extensive data with their system.

 

JB: What about “new” tech? Is it appropriate to apply such tech as part of solution structures?

EL: We have also observed that blockchain and smart contracts initiatives are now applied in the services to further secure that authenticity of the invoices, prevent double financing, and ensure the process’s speed and reliability. In the meantime, it can also tokenize the account receivables to achieve multi-tier financing to help SMEs in the upper-chain further to get more liquidity and improve supply chain resilience.

BdP: I would say that “new” tech is not yet commercialised at scale. We have seen an increase in POC’s and that governments are more supportive and have high on their respective agendas to drive digital innovation in their respective markets. To this end, some of these markets have created sandbox environments and inviting various industry players in commerce, such as a bank, fintech players, etc., to collaborate around digital initiatives.

 

JB: please share your experience with Payables Finance.

EL: Payables Finance has been consistently growing since the 2009 financial crisis, while the volume of Factoring has been volatile over the years. The following makes Payables Finance a popular solution in many countries in Asia:

  • Receivables fraud risk is real. Seller selection and proper due diligence of the transaction are major risk mitigation strategies to prevent fraud. However, the process is very complicated if the operation is done manually. Payables Finance is the most effective method to prevent fraud and minimise seller credit risk
  • Anchor buyers used to be the most dominant party in the supply chain, and suppliers normally are squeezed the hardest. However, we have noticed that those buyers now realised that they wouldnt succeed without the supplier’s viability. Maintaining a long-term relationship and help their suppliers is the best way to secure access to stable and quality supplies. In

 

JB: Credit Insurance is a key partner for many Factors, and how has it performed?

EL: The pandemic has reaffirmed the importance of robust risk management measures to combat the non-payment risk of buyers. Many large clients in export sectors now realise a quick and effective solution like factoring is urgently required, which provides a safety net to their vulnerable business. It is unrealistic to expect the insurance company to see the pandemic from the client’s perspective and give a forward-looking and prompt credit decision in its current state. Although the pandemic slows down the growth of the business and creates a tremendous impact on the global economy, it has transformed client’s mindset and risk perception, which will be very beneficial to the growth and development of Factoring.

RW: Due to the expected wave of bankruptcies caused by the economic effects of Covid-19, credit insurers started in Q4 2020 to reduce their exposures in countries and industries which were particularly affected. In Germany, it was managed smoothly because temporary guarantees of the government backed up the credit insurers. While credit approvals were granted in the past until further notice, Factoring companies have lately received more decisions with fixed expiry dates. All in all, the insurers have been quite supportive regarding the extension of payment terms of existing credit limits and the approval of repayment agreements. In Germany, the main Factoring companies are usually cooperating with more than one credit insurer. Besides this, the FCI Two-Factor model for Export receivables is also considered an alternative to credit insurance coverage.

 

JB: Did risk appetite support the resilience of the German Factoring market?

RW: In 2020, the German economy faced the strongest slump since the 2nd world war with a GDP decrease of 4,9 %. Despite this negative macro-economic trend, the German Factoring market could grow last year by 1,3 %. The growth was mainly driven by new smaller Factoring companies which are active in the domestic B2C Factoring and healthcare sector. This also explains the strong increase of Factoring clients, mainly located in the meantime, anchor buyers can use this finance programme as a bargain to negotiate better payment terms. The increasing complexity of KYC/AML requirements from regulators makes factoring on-boarding of suppliers a very time-consuming job. Payables Finance simplified the selection and implementation process, allowing banks to maximise the number of suppliers in the programme, and this will ensure new opportunities for growth in a turbulent time like this.

BdP: We have experienced an increased ask and need for more Payables Finance. Buyers want to ensure the sustainability of the supply chains and provide much needing liquidity support to their supply chains. From a banking perspective, risk factors, fraud, and credit risk drive Payables Finance's support. One can further argue that buyer-led solutions reach deeper into a client ecosystem providing access to liquidity when required.

 

JB: please share your risk management experience

RW: SMEs and corporates have discovered during the crisis that in many industries which have been strongly affected by the lack of demand and interruptions of global supply chains, no company is too big to fail. So the demand for comprehensive risk coverage by Factoring increased strongly. We received credit-limit requests for buyers in many sectors that have been considered low or no-risk industries before the crisis so that they were often excluded. To sell those receivables to a Factor and, through the asset sale and receipt of full payment, strengthen key financial metrics as Free Cash Flow has also become more important, including for SME clients.

EL: Covid-19 outbreak increases in the uncertainty of client’s trade transactions, as well as the credibility of buyers. It is not unusual to see payment extensions due to stagnant sales or financial difficulty arising from the pandemic, and even large buyers are facing temporary cash shortages and liquidity issues. In the meantime, trade credit insurance companies are cutting the credit limits down or set higher premiums for lower credit limits. More payment extension and claim declaration make maintaining the terms and conditions of existing policies mission impossible. in the MSME and consumer segment. The volumes of the main market players in Germany have more or less suffered from the pandemic-driven economic crisis. International Factoring has dropped by 2,7 %.

 

JB: Turning to Africa. Has the crisis reinforced the growth of SCF solutions in Africa?

BdP: We have seen a clear upward trend in the ask and need for SCF risk mitigating solutions from an African perspective. This is driven by a need to secure and support the value chain resulting in minimal disruption. Although this trend is largely driven by Global Multinational Companies operating across Africa, we see these needs coming across from local African corporates as well. In Africa, this type of solution has become more critical in not just ensuring the continuation of supply but also creating an avenue in supporting under pressure cash flows and largely “guaranteeing” accelerated cash flows when required, and even more so during the Covid times, and especially during the period of hard lock-downs.

 

JB: For Africa, and given recent events in Europe, what is your view of the value of industry guidance and standards?

BdP: The key fundamentals and standards of these solutions, such as Factoring, should be followed. We have seen in the recent past that moving beyond the boundaries can have far-reaching negative effects on the entire value chain. At Standard Bank, we are an adopter and advocate of appropriate SCF solutions and are an active member in key global industry bodies in assisting to shape the future of the SCF business globally, but more importantly, the support it brings to Africa and our client base.

 

JB: Looking to 2022, what are your priorities?

MLM: Open account transactions will continue to grow in the future as payment terms are increasing; having a Factoring or Payables support will be essential for getting new suppliers and nearshoring ones; but as the digitalised world is coming (in fact, did come), Factoring, Payables, and even trade finance will have to get there so as disruptions continue this financial tools can support and help disruptions to be shorter. A key challenge will be a connected and digitalised Supply Chain Finance world.

 

JB: Thanks, everyone, for your insights.

To summarise:

  • The pandemic has accelerated digitalisation resulting in more opportunities transforming factoring and growing clients in vibrant industries.
  • Factoring has delivered the expected benefits to clients and shareholders so far, but the challenges are not over.
  • Anchor buyers see the need to support their supply chain, and Payables Finance is gaining traction.
  • There are lessons to learn, and FCI has a vital role in education and advocacy.
  • We must also now apply ourselves to the challenge of reducing climate change and supporting sustainability.