The role of factoring: relevance to SMES
Table of contents: The Kazakh-American Free University Academic Journal №8 - 2016
Bondarenko Tatiana, Plekhanov Russian University of Economics, Moscow, Russia
Isaeva Ekaterina, Plekhanov Russian University of Economics, Moscow, Russia
Factoring companies often claim that they
are an ideal financing option for small, young and fast-growing firms. Particular
problems for firms may be experienced in the management of working capital. In
an attempt to alleviate such problems many firms have sought alternative forms
of finance by pledging an important element in their working capital, that of accounts
receivable, i.e. factoring.
A second dynamic often quoted by factoring
companies in favour of their particular relevance to SMEs is that related to
their ability to address skills deficiencies and/or high opportunity costs
faced by SMEs in pursuing effective credit management functions.
The importance, volume and structure of
factoring differs markedly in different markets during various periods of time.
Additional to the variances in market structure and size, the specifics of the
various factoring products also differ markedly across different sectors.
The role of factoring
Further in article main types of factoring
(fig. 1) and its feature are
provided, benefits of each type are allocated and the main schemes of work are
1. Main types of factoring
factoring is a classic scheme of factoring deal:
1. The Supplier makes shipments to the Buyer on the condition of a delay in payment;
2. The Supplier transmits to Factor the shipping documents;
2. Within 3 banking days Factor pays the Supplier up to 90% of the value of goods shipped;
4. On the expiry of the grace period the Buyer transfers to Factor 100 % of the value of goods;
5. Out of the Buyer’s payment Factor deducts the costs of financing and commission
and then transfers the remaining amount to the Supplier.
Benefits of this type of factoring for the
- A source of financing without providing
collateral (additional working capital, avoiding money shortage);
- Increasing sales volume (competitive
terms, broadening the range of products offered);
- Improving balance figures: decreasing
accounts receivable without increasing of accounts payable.
factoring - for Buyers of goods and services, willing to:
- obtain or increase the delay of payment;
- decrease expenses;
- improve financing of suppliers;
- receive additional earnings;
Figure 2 shows us how Reverse factoring works.
Figure 2. Scheme of work on reverse factoring
Reverse factoring makes such benefits for Supplier as:
- Fill up working capital, increase sales
volumes, improve balance figures;
- Decrease dependence from alterations of
Buyer’s payment terms;
- Establish close and durable relation with
the Buyer and sign with him long-term Supply Contracts according to the fixed
Non-recourse factoring gives to Supplier protection from credit risk. Factor accepts full
debtor's risk and couldn't reassign back accounts receivable to Supplier except
for cases when accounts receivable are declared invalid.
Non-recourse factoring includes full range
of factoring services: financing, analysis of buyers, management of accounts
receivables, collection of debts, full protection from credit risks.
Non-recourse factoring has some particular
- Supplier should has portfolio of debtors
(more than 3-4);
- factoring commission is charged during
the whole period of deferred payment and fixed additional period (in case of
delay in payment from Debtor);
- deferred payment period usually doesn't
exceed 120 days.
2-factor international scheme is risk
mitigation scheme in international factoring operations with functions divided
between two partner-factors.
factor’s functions: financing, accounts
receivable management, Exporter’s financial standing assessment.
factor’s functions: credit risk insurance
(non-payment insurance), timely payment control, Importer’s financial standing
of factoring for Exporter:
- Financing without pledge (replenishment of working capital, funds
- Increasing sales volume (competitive
terms, broadening range of goods);
- Improving balance figures - decreasing
accounts receivable without increasing accounts payable;
of factoring for Importer:
- More convenient payments terms (increased payment delay);
- Increase of purchasing ability;
- Planning repayment schedule;
- One creditor (while having many
factoring is a complete financial package that combines export working capital
financing, credit protection, foreign accounts receivable bookkeeping, and collection
factoring house, or factor, is a bank or a specialized financial firm that
performs financing through the purchase of invoices or accounts receivable.
Export factoring is offered under an agreement between the factor and exporter,
in which the factor purchases the exporter’s short-term foreign accounts
receivable for cash at a discount from the face value, normally without recourse.
The factor also assumes the risk on the ability of the foreign buyer to pay,
and handles collections on the receivables. Thus, by virtually eliminating the
risk of non-payment by foreign buyers, factoring allows the exporter to offer
open account terms, improves liquidity position, and boosts competitiveness in
the global marketplace. Factoring foreign accounts receivables can be a viable
alternative to export credit insurance, long-term bank financing, expensive
short-term bridge loans or other types of borrowing that create debt on the
balance sheet .
is suited for continuous short-term export sales of consumer goods on open
offers 100 percent protection against the foreign buyer’s inability to pay - no deductible or risk sharing. It is an option for
small and medium-sized exporters, particularly during periods of rapid growth,
because cash flow is preserved and the risk of non-payment is virtually
eliminated. It is unsuitable for the new-to-export company as factors generally
(a) do not take on a client for a one-time deal and (b) require access to a
certain volume of the exporter’s yearly sales. It is generally a more expensive
option that may erode a significant amount of an exporter’s margin. The advance
rate is generally limited to 80 percent of invoices that are factored.
factoring best suited for an established
exporter who wants:
- to have the
flexibility to sell on open account terms,
- to avoid incurring any credit losses, or
- to outsource credit and collection
(guarantee factoring) gives Supplier opportunity to receive financing at the
last day of deferring of payment and avoid delay in payment (fig. 3).
Figure 3. Scheme of work on maturity factoring
Advantages of maturity factoring for
- guarantee of payment (avoiding money
- chance to plan your cash flows;
- full factoring service except advance
- Supplier doesn't pay for factoring
financing for the whole period of actual delay in payment (as in recourse factoring).
Electronic factoring is a possibility for
clients to use electronic documents flow with application of digital signature
for factoring services.
Electronic factoring can be adjusted to any
of factoring products: recourse factoring, non-recourse factoring, reverse factoring,
Electronic factoring gives clients the
- Simplify all stages of factoring service;
- Reduce time from supply of goods / services till the
receipt of financing from factor from several days (under paper document flow)
to several hours;
- Reduce costs for printing, delivery and storage of documents.
While using electronic factoring all stages
of factoring operations are processed in on-line mode.
Use of commercial credit (deferred payment)
usually causes for company a number of problems concerned with effective
management of accounts receivables. Professional experience of factoring company
gives their clients opportunity to gain from effective measures related of management
of their accounts receivables:
- Evaluation of existing and new debtors
and set up of financing limits for each debtor;
- Tracking of accurate payment from
- Collection of receivables;
- Protection form debtor’s non-payment.
Professional management of accounts
receivables provides Client with:
- Better payment discipline of its debtors;
- Up-to-date information about accounts
- Effective collection of overdue receivables;
- Positive history of cooperation with
debtors on deferred payment terms;
- Optimization of staff and loan costs.
The question of ‘access’ to factoring
Factoring supports cash flow financing but
as a composite product it does this through the integrated provision of:
- Finance - noted as costs being
comparative with alternative forms of finance;
- Professional Credit Management Services -
accessing a quality of professional service that would normally not reside
within an SME and be prohibitively expensive to SMEs; and
- Credit Insurance - accessing this at
effectively cheaper rates that an SME could do so through a direct application.
It means that factoring is argued as being
relevant to SMEs - particularly over larger companies who would arguably have
the internal resources to access professional credit management services, and
Therefore, factoring (recourse /
non-recourse) is more relevant to SMEs than it is for larger businesses. Conversely,
invoice discounting (which is about finance rather than services) is more
relevant to larger businesses than SMEs.
The question of ‘access’ to factoring also
faces some problems:
- Risk Assessment;
- Security and Collateral;
- Legal Framework;
- Business Sectors;
- Size and Legal Form of Business;
- Costs of Factoring Finance;
- Costs of Factoring Services.
In each case SME’s are not discriminated
against in any way against larger businesses. The only real barrier to access
of factoring concerns the relevance of factoring to certain types of business /
sector. Factoring is suitable for ‘sell and forget’ businesses / products.
Factoring is not suitable for businesses / products which are characterized by
stage or lumpy payment schedules, retentions. extended warranties or tie ins.
This barrier to access is inherently related to the way factoring works i.e.
the factoring product itself and as such cannot be addressed through any
intervention without changing the ‘essence’ of what factoring is and how it
The question of access with respect to
various demand side issues related to product understanding and image was also
considered. Two key observations were made:
1) Factoring and how to use as a product is
generally not well understood by SMEs, nor indeed by advisers to SMEs.
2) Factoring has a lingering perception of
being finance of last resort and therefore may signal to buyers that their
supplier is in financial difficulties. This is clearly related to point 1.
There are no apparent legal, fiscal or
other government obstacles to factoring market development. The only two ‘economic
barriers to growth’ observed are:
1) Prevailing Economic and Business
There is a clear link between availability
of bank loans / overdrafts and the use of factoring - i.e. a squeeze by banks
leads to more firms seeking alternative options, being factoring. On economic
downturn, banks would generally seek to reduce their risk exposure through reducing
business credit, and in such conditions, business could turn to factors.
However, it does not necessarily follow
that factors will or can take all of this ‘new’ business. Of course, if
businesses are increasingly failing, then the factor will consider this closely
in its risk assessment procedures.
A similar argument can be made in times of
relative economic vibrancy, where businesses have access to increased sales
opportunities, but require increased credit facilities to service these orders.
Today in the conditions of credit compression and insufficient capitalization
banks may not be well placed to meet rapid and increasing demands for working
capital through overdrafts. Therefore, under these conditions businesses might
also be looking away from banks to alternative sources of finance that can
service their needs in line with increased sales volumes.
The Association of Factoring Companies
(AFC) published statistics of activities of the Russian Factors following the
results of 1 half-year 2016.
According to AFC estimates, turnover of the
Russian factoring in January-June of the current year constituted 923 billion
rubles that is 11% more, than for the same period of last year.
Among Factors the greatest shares in market
turnover following the results of 1 half-year 2016 occupy VTB Factoring (25%),
Promsvyazbank (18%), Alfa-Bank (12%), GPB-factoring (6%) and "FC
Otkrytiye" Bank (5%) .
In 6 months 2016 the Russian Factors paid
665 billion rubles of financing to four thousand Russian supplier companies,
processed 4,2 million deliveries to the address of 8,7 thousand buyers debtors.
The number of active clients of participants of the market for the last 12
months decreased by 33%, debtors - for 39%.
The total factoring portfolio in the second
quarter increased by 30 billion rubles and on 01.07.2016 constituted 239,5
Shares of types of factoring in turnover of
the market were distributed as follows: factoring with regress - 56%, factoring
without regress - 32%, without financing - 11%, a share of the international factoring
The forecast of dynamics of turnover of the
Russian market of factoring in 2016 following the results of August poll grew
to 17% in comparison with 2015 that corresponds to 2,15 trillion rub on
turnover. Participants of the market expect seasonal increase in demand for
factoring in the 4th quarter 2016 .
In the conclusion it should be noted that:
1) Whilst marked differences occur between
different sectors, SMEs typically rely on external financing for more than 50%
of their balance sheet value. Traditionally, this external finance has predominantly
comprised bank loans and overdrafts. However, the incidence of asset based
finance - including factoring - has been increasing rapidly over the past
2) Factoring is not one homogenous product.
Rather, it is a composite product offering a mix of finance, credit insurance
and financial management services. The main three recognizable forms of
factoring are classified as Recourse, Non-Recourse and Invoice Discounting .
3) Being a composite product, factoring is
unique and does not have any exact substitutes for the whole offering. Of
course, it does have substitutes for its constituent components - bank loans
and overdrafts for the financial component - financial services companies or
direct employment for the credit management component - and explicit commercial
credit insurance for the credit protection component.
4) Overall, factoring is seen as highly
5) Factoring is a business to business
service. But it is not suitable for all businesses as not all debts can be
6) Factoring companies typically fall
within one of three categories - banks, large industrial companies, or independent.
7) Factoring affords businesses access to
finance based on their growth in sales, rather than bank loans and overdrafts
which are normally available against an accumulation of tangible assets. As a
growing small business, investment in sales is often more a priority than investment
in fixed assets.
1. Официальный сайт BRC Trading Ltd. [Электронный ресурс].
-М., 2016. URL: http: // www.
brcglobalstandards. com/ Source: World Factoring Yearbook 2001, BRC
Официальный сайт International Trade Administration
[Электронный ресурс]. - М., 2016. URL:
http: // www. trade. gov/ Source: Trade Finance Guide
Официальный сайт Ассоциации факторинговых компаний [Электронный ресурс]. - М.,
2016. http:// asfact. ru/
Финансовый информационный портал [Электронный ресурс]. - М., 2016. URL: http://
Table of contents: The Kazakh-American Free University Academic Journal №8 - 2016