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FactoringandAccountsReceivableDiscounting.AnEvidencefromtheEgyptianMarket

ARTICLE·SEPTEMBER2013

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IbrahimAhmedFarag

UniversityofBirmingham

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Faculty of Postgraduate Studies and Scientific Research

German University in Cairo

Factoring and Accounts Receivable Discounting

By

Ibrahim Ahmed Ibrahim Farag

Date

Sep. 2013

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ABSTRACT

This paper spots the light on the Factoring and invoice discounting as alternative finance

methods and account receivable management policies. Through Inductive content

analysis approach, this research develops and tests different hypotheses suggesting a

linear relationship between a company’s decision to factor its receivables and company’s

size (Large corporate or Small and Medium size Enterprises) “SMEs”, company’s

exposure to international trade, financial strength, and whether the Factoring decision

itself is regarded as a basic or a primary source of finance like the conventional credit

obtained from the commercial banks or regarded as an alternative source of finance. To

test the hypotheses, the author interviewed the senior decision makers of 15 Egyptian

companies who were all offered the Factoring finance.

This is a unique study which is thought to be the only one to address the Factoring as a

finance option in Egypt, or at least after the revolution. Result of the study was surprising

and different from our initial assumptions as it found no linear relationship between

company’s decision to Factor its receivables and its financial strength despite our initial

perception of Factoring as a sign of weakness. Result of the study also showed that

Factoring in Egypt is also not necessary linked to SMEs it is more of a finance option

available to whoever can yield a surplus profit to cover the financing costs. Study

however reaffirmed our other hypotheses that Factoring is more suitable to those

companies involved in the international trade and the fact that Factoring image is under

exposed and its reputation as an alternative finance. Study also found a linear relation

between company’s decisions to Factor its receivables and its liquidity and another

relation relationship between the same decision and the cost of Factoring. The insistent

need for the liquidity vs. other options available to the company has been always one

very strong reason why a company decided or refused to factor its receivables despite its

high cost of finance compared to the traditional bank finance.

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Table of Contents

Introduction ...................................................................................................................... 5

Chapter (1) Factoring to finance the working captial………………………………...7

1.1 Introduction ………………………………………………………………………....7

1.2 Accounts receivables management and liquidity ……………………………………8

1.3 Definition of Factoring ………………………………………………………………8

1.4 Theorticial background about Factoring…………………………………………...10

1.4.1 Historical roots of Factoring............................................................................................. 10

1.4.2 Types of Factoring ........................................................................................................... 11

1.4.3 How do Factors work? The mechanism of Factoring………………………………….…14

1.5 Difference between Factoring and traditional banking practices………………….15

1.6 Understanding the relationship between Factoring and commercial banks….…....16

Chapter (2) Factoring: A sign of strength or a sign of weakness.………...….…….18

2.1 Determinant of the Factoring decision….................................................................18

2.1.1 Typical industries usually associated to Factoring business……..………………….........18

2.1.2 Common criteria affecting a firm’s decision to factor/discount its receivables.................19

2.2 Advantages of Factoring..........................................................................................21

2.3 Factoring as a finance alternative to grow the SMEs..............................................23

2.4 Factoring: A sign of strength or weakness?.............................................................23

2.5 Global trends in invoice discounting and Factoring…………………………..…..25

Chapter (3) Research methodologies………………………………………………...26

3.1 Introduction………………………...……………………………………………..26

3.2 Hypotheses………..………………...………………………………...…………..26

3.3 Sample …………………………………………………………………………...26

3.3 Interviews …………………..…………………………………………………...27

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Chapter (4) Results and Limitations………………………………………………..29

4.1 Results….………………………….…………………………..…………………29

4.2 Limitations……......…………………………………………………..……….....30

Chapter (5) Recommendation………………………………………………………32

Recommendations…………………………………………………………………...32

References……………………………………………………………………………………34

Appendix……………………………………………………………………………………..36

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Introduction

Factoring is a very old business and studies about Factoring are quite old as well. This

business has developed over the time and accordingly the scope and definition of

factoring changed simultaneously. Back on 60s (Robuchek, Teichroew, &Jones; 1965)

defined Factoring in a very simple and concise term. They defined factoring as a mean of

short term financing such as trade payables. In the same year (Phelps; 1965) defined

Factoring as an agreement under which the Factor “The financer” assumes the credit and

collection function of its client, purchase his receivables as they arise without recourse

for credit losses.

Finance market is weathering a state of turbulence in Egypt and many sectors are finding

it uneasy to access credit from commercial banks especially after the revolution. We

therefore belief in the importance of the Factoring business and its high potential in the

Egyptian market and this is why the importance of this study.

This study conducts interviews with 15 CEOs, CFOs, and corporate treasurers

representing a random sample of corporates working in the Egyptian market. It first

presents this business to the Egyptian market and also explores the market’s view of

factoring as well. It analyzes and suggests the most influential criteria which may affect

debtor’s decision whether to Factor or not to Factor its accounts receivables. The results

of the study showed that all the companies were mainly cost sensitive and none of them

had a stronger motive to affect their finance decision. Also, all the interviewed companies

defined liquidity as a common reason why they factored the accounts receivables.

Companies didn’t weigh a lot on the services presented by factors to justify its high

pricing. Those who refused the Factoring offer mostly refused it due to is high financing

cost and those who accepted the Factoring did it only for the liquidity with less

importance given to other services presented by Factors like “Credit insurance1” for

instance.

1 It may be noted that the credit insurance is not very popular in Egypt and not widely applicable in the domestic market unless to

insure the commercial debt extended to multinational companies which actually doesn’t add a lot to the suppliers whose already

accepting this reasonable risk and would need it only for less quality commercial credit. Credit insurance “Without recourse

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The research concludes that factoring companies are having a lot of challenges including

the high financing cost, complicated legislations, and market culture and immaturity in

Egypt where this business is relatively new. Most of the sample viewed the Factoring as

an alternative finance option although some of them looked at Factoring simply as a

different or a specialized type of finance not necessary an alternative finance.

Study finds Factoring as a valid way to finance the international trade and both importers

and exporters whom can take a full advantage of all the services rendered by Factoring

companies.

One other finding of the study was the fact that most of the CFOs viewed Factoring

service as equally important and suitable to both the SMEs and large corporates which

came in line with their consensus that Factoring is not a sign of weakness unlike our

initial hypothesis.

The study suggests that Factoring is very important method of finance; it is however,

according to the study, needs to be better positioned in the Egyptian market. It also needs

more innovative ways to reduce its cost to enhance its competitiveness. Study also

suggests that Factors can align themselves more to the commercial banks as to assist in

the non-performing and low credit scoring accounts in line with Factors acceptance of

higher credit risks.

Factoring” however is offered to the exporters to secure their overseas commercial credit. That will be understood and reflected in the

feedback of CFOs as will show on a later section.

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Chapter (1) Factoring to finance the Working capital

1.1 Introduction

Businesses rely on many sources of fund to finance their working capital, the current

assets. Those sources are either provided internally through owner's equity (Irwin; 2006),

or externally through trade creditors (Mian& Smith; 1992) or typically provided by

different lenders and financers including the scope of our study being the “Factors”.

It is therefore a very important decision of any management to identify the best finance

source considering the pros and cons of each of the decisions. While trade credit

(Commercial credit from suppliers) entails the company to many benefits, it also bears it

to other types of costs such as, opportunity cost of losing the cash discount, tax benefits

against deductibility of interest paid to lenders, and exposes the buyer (trade debtor) to

price discrimination in addition to other practices of bargaining power of the supplier.

Hence, the finance from the shareholders (Equity) while being considered the safest

financing option it is efficiently regarded as the most costly option for finance for any

efficient business.

The last option therefore is the external finance and herein we consider the

factoring/receivable discounting as the scope of our study. Accounts receivable and their

collectability are very important for the survival and growth of business, they account for

"Substantial fraction of corporate asset" therefore implies potential consequences on

firm's value" (Mian, Smith; 1992). Smart management of accounts receivable accordingly

can give the company an advantage to achieve a higher returns on its assets. Financially

distressed companies on the other hand are having a trade off whilst managing of those

receivables, a manifested conflict between transaction profitability vs. liquidity meaning

that a financial distressed company has to choose between liquidity and losing a market

share and granting a cash discount, thus accepting a lesser transaction profitability, or to

sell more with a higher price and giving up its already distressed liquidity.

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1.2 Accounts receivable management and the liquidity

ARM is defined as "Alternate assignment of some or all of the activities/functions

associated to the commercial debt finance decision, a result of which would be the

creation of accounts receivable as an asset in books of the seller”. As shown above the

decision to finance a company’s working capital has been very important and a key factor

influencing company’s profitability and survival sometimes.

Distressed companies normally having only one way to survive which is to increase sales.

Liquidity yet comes as a challenge facing distressed companies to achieve this target.

A company’s decision to factor its receivables is therefore sometimes critical for business

survival. Likewise, fast growing corporate are investing a sizeable part of its assets in

the trade receivables which also creates a negative operating cash flow that can also

hinder its sustainable growth. Receivable management is one way to help distressed

companies going out of its financial distress and to help fast growing ones to expedite its

growth. However, receivable discounting business is arguably still quite unknown to

Egyptian market which, for decades, had been overwhelmed by traditional banking

services and classic lending types. Securitization, Forfaiting, Invoice discounting, and

Factoring come amongst most common receivable discounting techniques. This research

focuses on the Factoring and the invoice discounting and introduces both receivable

discounting techniques as reliable alternatives to provide the cash flow needed for the

companies to fuel its growth and to overcome liquidity distress.

1.3 Definition of Factoring:

Over the years, Factoring has grown and its scope also extended and evolved. Likewise

definition of Factoring developed and kind of changed over the years.

(Kerr; 1981) extended the scope of Factoring to cover activities presented by Factors

other than lending. He defined Factoring as buying of client's accounts receivable either

through advancing him money against the collection or paying him out of the collection;

which he named a "maturity factoring".

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(Mian; 1992) suggested a simple definition of Factoring being company's sale of its

accounts receivables to a financial institution other than its captive one. (Sopranzetti;

1999) defined Factoring through the eyes of service providers, the Factors, being a

financial institution that are in the business of buying and managing other firm's accounts

receivables whereas through a typical Factoring contract the Factor bears credit risk and

the responsibility to monitor the credit quality of the outstanding accounts receivable.

(Rober, Carl; 2000) defined Factoring as a process where the lender, the Factor,

underwrites the extension of credits by purchasing accounts and notes receivables of a

given company, consequently, customers of this company are notified about the transfer

of debt from the seller to the Factor. This very detailed explanation of the transaction

itself as to define the Factoring is elaborated later and presented as “Notification

Factoring”.

(Soufiani; 2002) who is an important and seasoned finance scholar who specialized in

Factoring didn’t go quite far from the very old definition of (Kerr; 1981) and thus defined

Factoring as an economic decision whereby a specialized firm undertakes the

responsibility for the administration and control of a company's debtor portfolio enabling

the company to sell their accounts receivables at a discount in exchange for cash.

(Weisel, Harm, & Bradley; 2003) in a very innovative definition resembled the Factoring

of receivables to the use of credit card, whereas a company sells product to customer

against credit guaranteed, collected and hence paid by issuing bank without recourse on

the seller on the event of credit default by the buyer whose payment is assigned to the

issuing bank of the credit card. In another word, the company sells the receivable to the

host bank which collects and guarantees the full amount and repays it minus small

percentage. Reduced credit risk, and faster cash flow for the company, is hence the

primary motivation. (Krishna; 2005) analyzed the financial sector market in India and

previewed Factoring only as traditional fund-based financial service.

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Citing Factors' traditional orientation and consideration to Small and Medium Size

Enterprises (Whale, Trevor; 2004) described the Factoring as a method of commercial

finance while (Hubbard; 1987) and (Asselbergh; 2002) described Factoring as an

alternative mean of finance. (Miller; 2009) previewed Factoring as a type of accounts

receivable finance and defined its business scope, in line with previous definition, as a

secondary market that is alternative to bank finance.

FCI is “Factors Chain International” presents itself as “A global network of leading

Factoring companies, whose common aim is to facilitate international trade through

Factoring and related financial services. FCI network counts 263 Factors in 72 countries,

actively engaged in more than 80% of the world's cross-border Factoring volume”. It

covered the range of services provided by Factors in its definition defining Factor as “A

complete financial package that combines working capital financing, credit risk

protection, accounts receivable bookkeeping and collection services. It is offered under

an agreement between the Factor and a seller. Under the agreement, the Factor purchases

seller's accounts receivable, normally without recourse, and assumes the responsibility

for the debtor's financial ability to pay. If the debtor goes bankrupt or is unable to pay its

debts for credit reasons, the Factor will pay the seller. When the seller and the buyer are

located in different countries the service is called international Factoring”.

1.4 Theoretical background about Factoring

1.4.1 Historical roots of the Factoring business

Factoring is known as far back as the 14th century (Zinner; 1947) while its roots go back

to the Norman quest in connection to the wool industry (Hillyer; 1939). The word

"Factor" is derived from the Latin word "Facere" to make or to do- i.e. to get things done

(Palia & Sopranzetti; 2004).

(Silverman; 1949) explained the start of Factoring when "Factors" were merchant in

colonies who had used to assume the risk of credit losses and perform the function of

collection to the account of the European merchants during Fifteenth and sixteenth

centuries, Factoring scope had since progressed and undergone a structural change and

focused the business only on Financial, credit, and collection service without

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merchandising and storage functions Factors had used to carry on before 1930. He hence

defined Factors as financial institutions which principal purpose if the make credit

available to industry through purchase of accounts receivables.

Despite UK and US have been the major forces in Factoring and discounting business, of

which Europe accounts for two thirds of world Factoring business most of which is being

done in UK and Italy (Deacon & Whale, 2004), Factoring image however is still

underexposed and controversial there (Hubbard, 1987).

1.4.2 Types of Factoring

Academicians and professionals have got different classifications for Factoring which is

reflected on their respective definitions of Factoring and influenced by the development

of this centuries old business. Whilst most of them insist that a typical Factoring implies a

notification clause to the debtor issuer and thus with no recourse on the seller, the recent

applications involved a non notification Factoring and also a Factoring with recourse

causing different classifications to evolve. Industry veterans insist that “Non-notification

Factoring” is not a standard Factoring, rather, it is an “Invoice discounting” and some of

professionals are calling this type of Factoring it a “silent factoring”

In line with the very old presence of the Factoring, it had gone through different phases

and limitations. For instance during the thirties of the twentieth century (Dalton; 1936)

tacked Factoring as it ideally require a debt assignment notification with the relationship

with the Factor. (Zinner; 1947) and (Byrd; 1958) classified Factoring into notification

Factoring and non-notification Factoring after arise in the demand not to notify the

buyers (Debt issuers) about the Factoring relationship. They classified Factoring products

on notification basis i.e. whether debtors are notified with the sale of the receivable or

not.

(Byrd; 1958) had a different classification for the Factoring based on the Factor’s right to

recourse; He classified Factoring accordingly into a recourse Factoring and nonrecourse

Factoring where the different from his perspective was simply a difference between

selling, in the case of nonrecourse Factoring, and borrowing in the case of recourse

Factoring.

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After quite some time, (Wooller; 1981) suggested that in a typical Factoring a debtor is

notified that debt is assigned to the Factor thus the payment shall be made to the Factor to

discharge debt, while in the case when the debtor is unaware of the assignment such as

the case of non notification Factoring it is considered to be an invoice discounting not a

typical Factoring. In another word he believed that Factoring has to be on notification

basis otherwise it is not a standard Factoring.

Recently, (Soufani; 2002) and (Deacon& Whale; 2004) linked the two classifications of

Factoring (Notification and right of Factor to Recourse), they argued that "despite its

early foundation, Factoring has been ignored as a source of corporate finance this why

some companies may not favor to Factor its receivables to avoid notifying its customer2.

This is in our hypothesis is tested whether the Factor is seen by the companies as a sign

of strength or weakness.

Overcoming this obstacle, the notification and the negative reputation of the factoring,

encouraged a subsequent development of invoice discounting on a non-notification basis,

against ledger of sales, so-called "Non-notification-Factoring". They explained the

mechanism of non-notification Factoring through making advance only on the security of

receivables, as the seller checks his own credit and bears probably credit losses and thus

do his own collection and ledgering then turn on the proceeds in their original form to the

lender.

It may be noted that the flaws (in the eyes of lender) behind this kind of credit “Non-

notification Factoring” is the risk fraud, mainly assignment of factious accounts, failure

to make delivery, a fraudulent and forged delivery receipt and failure to turn over the

proceeds of collection presented. The high risk associated to non-notification Factoring

created a need to change the genuine structure and business model in which Factors had

used to operate for centuries. That came up with a real need to claim against company's

customer in the event of default of its buyer, the debtor, this practice is known as

”recourse".

2 This point synchronizes with our hypothesis that large corporates avoid to notify the debtors about the Factoring which comes in line with our hypothesis that Factoring is a sigh of weakness.

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Recourse Factoring is a typical asset based lending “ABL” where assets are used as a

collateral for the loan while title and risk remains with the seller unlike nonrecourse

Factoring whereby assets are sold to the Factor as that title and risk passed to him

(Weisel, Harm& Bradley; 2003).

The disadvantage of recourse Factoring actually offset all the accounting benefits gained

from selling the receivables on nonrecourse basis, which enhances the cash flow and

treated as off-balance sheet finance whereas recourse Factoring is a standard asset based

lending such as commercial banking practices (Marti, Duchac & Lindley; 2001).

In conclusion, recourse Factoring entails Factors to claim the money from the "borrower"

in the event of default of payment from their customers, while nonrecourse Factoring

doesn’t give the Factor the right to claim the money in the event of default, Factors

thereby become a purchaser of debt and their client's status becomes a seller of debt

rather than being a borrower (Soufani; 2002).

(Levy; 2007) denied any link between the need for nonrecourse Factoring and the

financial strength of the seller (Borrower) as it only considers the status and credit

worthiness and financial strength of the debt issuer debtor (seller's customer). It may be

noted that that at any case the nonpayment because of performance related issues or

dispute because of defects, quality, product description,…,etc is however still charged

back by Factors to the seller (Mian& Smith;1992).

A completely different classification of Factoring was added by (Hubbard; 1987)

considering the credit protection function rendered by Factors. In addition to the regular

classification on notification basis, he classified Factoring into a "maturity factoring" and

"discounting Factoring". In maturity Factoring the customer only expects to receive the

full payment of the invoice in maturity date capitalizing on the credit protection given by

Factor whereas in discounting Factoring he receive a sight payment, as a discount,

against assignment of the invoice to the Factor. Hubbard hence added a so-called

"Overadvance Factoring" which implies financing of customer's inventory (purchases) in

anticipation of a assigning of future receivable will be created after sale of this inventory.

This practice ideally suits business with seasonal purchases/sales.

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From the above definitions and classifications in the previous literatures, it is obvious that

previous research suggested the following:

1) Factoring scope is mainly oriented to the finance function despite its extended range

of services.

2) Factoring is more suitable to SMEs rather than to the large corporates.

3) Factoring is a sign of weakness and therefore seen by CFOs as an alternative finance

option.

1.4.3 How do Factors work? The mechanism of Factoring

Workflow in Factoring companies seems to be of a very old culture and standardized

amongst the industry. (Dalton; 1936), (Silverman; 1949), (Soufani; 2002), and (Levy;

2007). Summarized the mechanism of invoice Factoring as explained hereunder:

1) The beneficiary receives sales order then supplies goods and issues the invoice.

2) Supplying firm (beneficiary) request financing and provide the debtor (Buyer) book

"Sales ledger".

3) Factor advance cash against invoice.

4) Buyer (Debtor of Factor's Customer) is expected to make payment to the Factoring

firm within the pre-specified period of time, as written on the invoice.

5) Factoring company charges fees and interest to its customer.

6) Shall customer's firm default on payment, Factors shall not claim against its customer,

ideally in the event of nonrecourse Factoring.

(Ittleson;1978) hence wrote about the structure which links Factors together, being the

legislative body organizing the international trade and facilitate communication between

member Factors around the world, Factoring Chain International (FCI). As explained

above, it coordinates and organizes the communication between different member

Factors worldwide. Each member company (Factor) is hence required to have a reliable

financial backing through bank, insurance company or other financial institution.

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To promote competitiveness in the industry, FCI encourages the presence of more than

one Factor in each country. Foreign Credit Insurance Association (FCIA) is another

administrative body; it is a private organization of insurance underwriters affiliated with

US export-Import Bank and provides insurance against commercial and political credit

risks for companies involved in foreign trade.

1.5 Difference between Factoring and traditional banking practices

Factoring technical scope and criteria of doing business is marginally different from the

way traditional banking is being done. (Dalton; 1936) verified Factors from banks on

acceptance of deposit basis, as Factors ideally do not accept deposits; alternatively, they

secure finance through commercial banks. Factors thereby guarantee to commercial

banks financing a broad class of companies which banks can be not prepared or equipped

to finance. Furthermore, commercial banks do not guarantee credit, unlike Factors which

credit guarantee is one of the core functions.

(Silverman; 1949) stated that difference between Factoring and banks lies only in both

the notification as banks do not notify debtors unlike Factors thus banks usually take

recourse against its customers in event of default while Factors ideally do not.

Furthermore, unlike commercial banks, Factors do not stipulate customer to leave fund

on deposit as a provision, usually known as margin. Obviously this difference was since

influenced by the scope of Factoring and its historical limitations which no longer exist in

today’s world and recent applications of Factoring. (Byrd; 1958) Found that banks often

have stricter credit standards than those of Factors, this is of course is reflected in lesser

pricing usually offered by commercial banks.

(Rea, Chilton, Crandall, Fagerberg, Goldberg, Greene, et al.; 1980) referred to Factors'

practice in US to accept of payment of interest to customers who leave the fund beyond

the maturity date i.e. after collection of receivables, this practice proven to help in

reducing Factor's weighted average cost of fund as it may pay interest to credit customers

more it usually pays to other sources of fund, mainly lenders like commercial banks.

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1.6 Understanding the relationship between Factoring and commercial banks

There is actually a sort of overlapping relation between banks and Factors, banks may get

into Factoring business for several reasons:

1) Relatively stable business

2) Higher return than this of commercial banking business due to higher associated risk.

3) Factored accounts receivable provide source for future customers either for loan or

deposit business.

4) Banking entry to Factoring business entails them to gain a portion of the industry,

though indirectly.

5) Banks thereby also get men skilled in acquisition, supervision, and collection of high-

risk commercial accounts into bank managerial ranks, men who can handle these

types of exposure. This skilled labor may well provide the know-how for a

subsequent extension of lending to customers who were previously only able to

access credit from finance companies.

6) Banks are also indirectly involved in financing high-risk and small companies

through financing of Factors which may accept to lend such kind of customers upon

fulfilling of Factoring criteria.

7) Shall not banks keep up with the dynamically changing business environment; they

will obviously get out of business. The telecommunication giant Ericsson transferred

its Chinese business from Chinese banks to Citibank (China) in March 2002, mainly

because of lacking of Factoring by Chinese banks. Financial innovation is very

essential to accommodate high quality international accounts and to keep up with the

increasing completion in the banking business at the wake of liberalizing financial

services sector in most of the countries all over the globe (Bin, Locke& Willette;

2003).

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Few Factors are still independently owned (Nearly 7%). Bank owned ones are larger in

terms of turnover and employees. They now account for more than 93% of total market

turnover. Most of UK banking institutions are currently providing Factoring service

(Soufani; 2002).

Large Factoring companies, supported by banks, enjoy economies of scale and cost

advantage in accessing information therefore they can engage in larger exposure and get

more diverse client base. Banks thereby have superficially taken over the Factoring

business due to their wide, though indirect, control over the Factoring now (Kerr; 1981).

Banks on the other hand are ideally still reluctant to finance SMEs (Irwin; 2006) or to

extend self liquidating line of credit to submarginal application of those of no credit

history, poor earnings, or weak financial ratios (Shay& Greer; 1968) It is estimated that

banks finance only 8% of working capital requirements and just 6% of new investment

requirements of SMEs, whereas the most effective method to finance their need is the

"formation of dedicated channels for this activity". Importance of Factoring to banks has

hence evolved, some leading banks ventured into Factoring, mainly by acquisition.

It may be noted herein that (Irwin; 2006) reinforces our hypothesis that Factoring is more

linked to finance the SMEs than banks. It also comes to refers to an implicit linkage

between the factoring and the low credit rating which also suggests that factoring is a

sign of weakness and an alternative finance to those having a restricted access to bank

credit.

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Chapter (2) Factoring: A sign of strength or a sign of weakness

2.1 Determinant of the Factoring decision

2.1.1 Typical industries usually associated to Factoring business.

In an attempt to find a linkage between the company’s business/industry and its decision

to factor its receivables (Zinner; 1947) identified textile industry as the main industry

associated to any Factor while (Silverman; 1949) added furniture, appliances and

equipment industries to textile as a major interplaying partner to Factors and further

extended the scope to cover businesses with seasonal sales such as summer and winter

sportswear, bathing suit, and rubber as typical industries inclining to Factor their

receivables. (Byrd; 1958) found that Factoring is relevant to any industry which structure

consists of many manufacturers selling to many retailers and with significant overlapping

of those retail customers between the producers (That entails Factors to cost advantage to

investigate credit worthiness of the main issuers of trade debts-retailers- in this industry).

Over the time Factors have developed their traditional scope of Factoring and added new

lines of businesses in addition to textile and allied fields as furniture, shoes, toys, lumber,

and metal products became valid segments with which Factors started to intimate with

(Shay& Greer; 1968). In line with the technological reform in late seventies (Ittleson;

1978) added hardware, plastics, and other consumer goods to the segment industries fit to

scope of Factoring. During the practitioner forum, Rea, Chilton, Crandall, Fagerberg,

Goldberg, Greene, et al. (1980) reaffirmed that Factoring was traditionally a mean of

financing certain industries, such as textile, apparel and furniture, and carpet, houseware,

marine products, paints hardware, plastics, metal products, toys, and sport goods, while

defined typical business fits to Factoring as manufacturers, converters, assemblers,

material fabrication, and finished products producers. (Kerr; 1981) Scoped anything sold

in retail and service businesses as Factorable ones. Also (Hubbard; 1987) and FCI added

consumer electronics to the list of industries associated to Factoring while textiles,

clothing and electronics have remained to be the most popular industries, however

manufacturers of industrial and farm equipment, office equipment and processed food are

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increasingly turning to Factoring. Finally (Levy; 2007) has further suggested security

firms as typical customer for Factoring.

2.1.2 Common criteria affecting a firm’s decision to factor/discount its receivables

Many Factors are common amongst the companies which decided to Factor its

receivables. It is important to understand why a company would resort to the Factoring

option which will also be taken as evidence whether the Factoring is a sign of weakness

or strength. According to the literature, the below criteria are key determinants to better

group and also understand the motives behind a company decision whether or not to

Factor/discount its receivables.

1) Company size (turnover, number of employees, capital) as the Factoring in large,

according to the literature, is suitable to SMEs.

2) Company’s sector.

3) Management’s professionalism and ownership structure.

4) Seasonality of sales

5) Other supplier's cash flow (Sufficiency of trade credit).

6) Financial healthiness, growth rate.

7) Compliance to certain covenants and financial reporting,

8) Distressed companies which need a quick fix.

9) Access to bank credit client’s years in the market

(Hillyer; 1939) had suggested that SMEs makes up the major market for Factors while

(Zinner; 1947) reiterated this argument and confirmed that Factoring business is devoted

largely to serving SMEs. He further added that Factoring decision, as taken by the

Factors being the supply side, is highly correlated to set of criteria being turnover,

20 | P a g e

product, sector, age, customer (Debtor), management, operational sustainability,

profitability, collectability, credit instrument underlying the debt (Credit notes for

instance), and less correlated to other determinants, though still being considered, such as

company's size (No of employees), and the financial statements

( Byrd; 1958) stated that Factor are evidenced to be mainly used by SMEs, while Factors

hence claim to be the ideal finance solution to those firms characterized by being new,

fast growing and capital intensive or innovative ones and those which face sales

seasonality. He mentioned that covenants usually accepted by Factors as a sort of comfort

are authorization to inspect borrower's book upon demand, supporting documents such as

original invoices, or signed receipt from shipping company or the buyer may be also

needed. Through his study, he overcame the limitation of Factors a in case of a firm

selling to small outlets and retailers it will usually have a huge number of invoices with

small dollar value. This situation soar the finance burden cost significantly up because of

increasing administrative costs.

During the practitioner forum (Rea, Chilton, Crandall, Fagerberg, Goldberg, Greene, et

al; 1980) concurred the fact that while Factors would opt to bank with companies with

reasonable working capital, sound financials, experienced management with "growth

potential".

(Smith& Schnunker; 1994) dissented any significant correlation between seasonality of

sales, firm size, and other supplier's cash flow, and firm's decision whether to Factor or

not. They only linked Factoring likelihood to transaction cost variables (Including cost of

information) and other variable describing distribution channel. In contrast (Soufani;

2000) found that firm's size, age, sector, and ownership structure company are amongst

the determinants positively correlated the decision to Factor company's receivables.

The obvious contradict between Smith and Schnuker's conclusion, and Soufani's one is

that the earlier examined the determinants affect the Factoring decision from company's

point of view, the demand side, whereas the later investigated this decision from the

Factors' perspective, being the supply side. (Asselbergh; 2002) solved this debate and

concluded that Factoring will be sought by those SMEs which are new, facing huge

21 | P a g e

capital expenditure, and seasonality of sales. As a matter of fact this debate is mainly the

core of our research.

(Levy; 2007) demonstrated more sophisticated model to understand the motives behind

company's decision to resort to Factoring being those companies having one of the

following criteria

1) Companies need to expedite its cash flow to finance its growth or to comply with

certain covenants and financial reporting.

2) Distressed companies which need a quick fix.

3) New firms no yet established may be under bargain power from both suppliers (Short

or no trade credit), and buyers (extended trade debt) bearing in mind the limited

resources, mainly working capital, ideally available to new companies, together with the

difficult access to bank credit, Factoring receivables will be a feasible and ideal solution

to weather this standstill. This model reiterates our hypothesis and reaffirms the

prevailing perception of Factoring being a sign of weaknesses or at least to only intimate

to smaller size and not credit worthy customers

(Miller; 2009) concluded that client with less than two years in the market or with low

credit scoring are typical customers for Factors, that was based on the assumption that the

basis while assessing customer's from Factoring perspective is only customer's ability to

pay unlike banks which have more sophisticated considerations while doing the credit

assessment. He referred to the fact that Factors don’t lend money, they buy a portion of

small business's assets that is the accounts receivables.

2.2 Advantage of Factoring:

1) One of the greatest problems facing exporters is the increasing insistence by importers

that trade be conducted on open account terms (Shay& Greer; 1968). This often means

that payment is received many weeks or even months after delivery (FCI website).

2) Through the export Factoring, which is to sell the overseas sale invoices; Factors

(Ittleson; 1978) facilitates exporting on open account basis (Import Factoring allow

22 | P a g e

importers to import on open account basis too), it protects customer from foreign trade

risks, mainly currency devaluation, and default/ delayed payments risks, it contribute to

expand company's overall business in terms of turnover and customer base, it also

enhances company's cash flow and credit investigation costs.

3) Factoring shall also free company's management to focus more on basic areas of

business such as production and marketing through outsourcing the credit investigation

and collection tasks to Factors.

4) One more advantage is realizing that customer's company has a Factor's support help

its credit standing with suppliers. Additionally, Factorability of company's receivables

adds some sort of financial stability to which the company may resort during tough time.

This is seen by some CFOs to as one valid reason to deny that factoring is a sign of

weakness.

5) Many customers look to Factors for more than financing services. Due to their deeply

rooted experience in certain industries, Factors are oftenly called by customers to offer

counseling on both financial and managerial problems, including acquisition, capital

raise, and internal reorganization. Besides, such as Forfaiting, Nonrecourse Factoring

could also eliminate the credit concentration with one buyer (Krahmer; 1990).

6) A rather new advantage of Factoring is its validity as a solution to those firms facing

underinvestment problems while being under restrictions, like those of covenant

agreements, to extend their borrowing, for instance, those companies under an agreement

which ceils their debt-to-equity ratio or a company under a financial distress.

7) Factoring can also provide a collateral for loan which may not otherwise be available

to the company in addition to its positive correlation to the volume of sales as that

increasing financing needs at the wake of increasing sales can be fulfilled through

financing the resulting AR (Ulrich; 1978).

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2.3 Factoring as a finance alternative to grow the SMEs

SMEs are very important and widely deemed to be the backbone behind a sustainable and

invulnerable economic growth (Irwin; 2006). In developed nations, it accounts for 99%

or more of all firms. They are characterized by being flexible, innovative and responsive.

They incline to be more productive. Furthermore, creation of more SMEs enables nations

to grow a firm middle class. Despite SMEs' renown essence and role to enhance the

competition to the economy, job creation, boost company-wide efficiency, growth,

innovation and poverty alleviation (World bank website), SMEs are still suffering from

lack of finance. Factors hence evolved to bridge this gap; they mainly segment SMEs

(FCI website). As a matter of fact SMEs of turnover less than GPB 3M are the major

segment behind growth of the Factoring business in UK. (Soufani;1999).

Commercial banks are usually reluctant to finance SMEs. It is estimated that banks

finance only 8% of working capital requirements and just 6% of new investment

requirements of SMEs. (Pino; 2004) suggested that the most effective method to finance

the needs of SMEs is the "formation of dedicated channels for this activity". Banks have

been hence indirectly engaged in financing those companies through financing of Factors

which may accept to lend such kind of customers upon fulfilling of other criteria. In

another word, while banks are ideally hesitant to extend self liquidating line of credit to

sub marginal application of small size (Shay& Greer; 1968), no credit history, poor

earnings, or weak financial ratios they do it through Factors, most of UK banking

institutions are currently providing Factoring service (Soufani; 2002).

2.4 Factoring: A sign of strength or weakness?

Banking with Factors has been always a controversial decision. Some companies do not

even know what Factoring is all about. Most of the researchers and industry veterans, in

our opinion, already agreed upon the weakness status of companies which use to bank

with Factors under the impression and reputation of Factoring being an alternative

finance or the last resort to get the finance. This is not a new understanding or conclusion

it is an old perception. We however will still test it in our study.

24 | P a g e

For instance: (Silverman;1949). Affirmed that many businessmen perceive Factoring as a

sign of weakness, whereas (Rea, Chilton, Crandall, Fagerberg, Goldberg, Green, et

al.;1980) assured the perception of Factoring being the last resort for client's financing

needs. (Robichek, Teichroew & Jones; 1965) clearly stated that Factoring is a sign of

weakness and did not consider it amongst efficient sources of short term finance as it is

usually less desirable; they added that it is not used in practice unless it is the only

available alternative.

To investigate this argument (Hubbard, K. ;1987) found that only 3% of companies

which sales range between USD 5-200 Million were using Factoring in a survey done on

US market, whilst 80% of the respondents did not even know what Factoring was. He

attributed this finding to communication problems or marketing inefficiency. For

instance, Factors can market themselves as a cheaper alternative to costly bookkeeping,

collection, and credit costs. (Soufani; 2002) found that company’s deciding to resort to

Factoring are those facing difficulties to obtain finance through traditional banking

services while companies with cost advantage and market power are less likely to use

Factoring. Likewise, (Deacon& Whale; 2004) translated the ignorance of Factoring as a

source of corporate finance, despite its early foundation, into being a sign of weakness.

Whereas some companies may not favor to Factor its receivables to avoid notifying its

customer (Factors oftenly require a debt assignment notification) with the relationship

with the Factor. This encouraged the subsequent development of invoice discounting on

non-notification basis (Against ledger of sales).

Against these arguments; (Ittleson;1978) stood reluctant to that consensus belief about

Factoring and hence stated that- in contrast- many customers look to Factors for more

than financing services. Due to Factors' deeply rooted experience in certain industries,

they are oftenly called by customers to offer counseling on both financial and managerial

problems, including acquisition, capital raising, and internal reorganization. (Asselbergh;

2002) also denied that signal of weakness; he stated that Factoring is not a sign of

weakness despite companies which Factor their receivables are usually less profitable and

denied its perception as the last resort for finance. (Weisel, Harm& Bradley; 2003)

insisted that Factors get themselves allied to growth companies unlike the traditional

perception about Factoring to be associated to companies expected to go out of business.

25 | P a g e

2.5 Global trends in invoice discounting and Factoring

Modern applications of invoice discounting and factoring are Forfaiting and

Securitization. To explain the difference between securitization and Factoring (Palia&

Sopranzetti; 2004) underlined the described a typical Factoring when the company sells

the invoice to Factors, while in securitization the firm may only sell a portion of the

receivable. Furthermore, securitization arrangement commonly does not have the facility

to perform on-going monitoring of underlying receivables, this task is ideally being done

by the borrower, in contrast to the Factoring who is undertaking this function and can

even outperform the company in so doing due to its specialized credit management

department and expertise. One other modern application of Factoring is the Forfaiting

(Krahmer; 1990) which is commonly used to finance exports worldwide which

advantage, such like Factoring, can also minimize the credit concentration with one

buyer. However, it is more of long-term finance which has more focus on financing of

capital assets.

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Chapter (3) RESEARCH METHODOLOGIES

3.1 Introduction

There is no sufficient material or data in the Egyptian Market to quantitatively test our

hypothesis where the factoring business has been recently introduced, so the research

used the qualitative content analysis, inductive approach, to better understand and test our

hypothesis (Elo S. & Kyngas H ; 2008). We favored this method as a valid mean to

provide a new presentation and a thorough view of the Factoring business in Egypt and to

test apply the theoretical framework collected and concluded from our literature review.

Results and conclusions thereby are categorized and grouped according to our own

modeling and conceptual mapping in accordance to our understanding of the theories and

literature. We converted the results of the interview into a written text in accordance to

the usual data preparation step commonly followed in the qualitative content analysis

(Zhang Y. & Wildemuth B. M.; 2009).

3.2 Hypotheses

The research is based and interviews thus made to test the following hypothesis:

H1: Factoring is having an unfavorable image by CFOs and seen as a sign of weakness.

i.e. there is a linear relationship between company’s financial strength and its decision

whether or not to factor its receivables.

H2: Factoring is an alternative finance sought by companies having a restricted access

to bank finance.

H3: Factoring is geared to serve the SMEs more than the corporate clients.

H4: Factoring is more suited to those companies involved in the international trade.

3.2 Sample and population

The managers responsible for the finance decision making of 15 firms which were

offered the Factoring/Invoice discounting credit were interviewed. The firms were

27 | P a g e

randomly selected out of Egypt Factors records (The only licensed Factoring Company in

Egypt) meeting the following criteria.

1) Continued relationship with the client as to accept to dedicate nearly 90 minutes for

an interview and to divulge some confidential information. Some of the CFOs/CEOs

refused to cooperate noting that all of them had refused the Factoring offer for

different reasons.

2) Selected companies were approved and contacted at the first place according to Egypt

Factors criteria (Sales more than EGP20M, 3 years in business, reasonable credit

profile and good reputation in the respective market) Accordingly, the population is

limited to those companies which were offered the Factoring not all the companies

which may have needed the Factoring (There is still a probability that some

companies needed the Factoring but did not meet Egypt Factors above set criteria).

3) The interviewer has a good experience with the business of those companies which is

noted in his feedback/comments, against managers’ feedback, as to validate the

response of the CFOs against his personal understanding.

It may be noted that Egypt Factors data base contains 231 companies of which only

39 companies accepted to cooperate. The selected companies (15 companies) were

those companies representing the most possible diversified backgrounds (Size,

business, export, financial position, its decision to factor/not to factor,…,etc) plus the

fact that only those companies agreed to divulge their financial figures and publish

the results of their interviews.

Accordingly the sampling method is the convenient sampling which has some

limitations to generalize its conclusions.

3.4 Interviews

Companies were asked different questions and preplanned discussions were opened with

the managers while questioning the below points:

General Data

a. Company size (Sales, No. of employees, legal entity, capital).

b. Management knowledge (Education, experience, company’s length in business).

28 | P a g e

c. Type of business.

d. Managers’ understanding of banking and non banking financial institutions in general

and Factors in specific.

Management

a. Familiarity of Factoring and types of Factoring Notification vs. Non notification, or

recourse vs. without recourse.

b. Identification of the relationship between the Factors and commercial banks.

c. Understanding the difference between the Factors and types of receivable discounting

(Credit insurance, Forfaiting, securitization, invoice discounting).

Liquidity

a. Direct question about company’s liquidity position.

b. Accessibility to bank finance.

c. Percentage of utilization of available bank credit.

d. Commercial credit granted from suppliers, as a significant cause of operating cash

inflow.

e. Growth rate, commercial credit granted to customers, inventory levels, as a

significant cause of operating cash out flow.

Factoring

a. The reason why the company agreed/refused to Factor its receivables (With recourse

or without recourse).

b. Factoring image; a sign of weakness or a sign of strength and why?

c. Factoring is more suitable to SMEs or large corporates (Sales more than EGP180M).

d. Factoring is more suited to international trade or domestic business.

e. Whether the company prefers notification factoring or non-notification factoring.

f. Whether Factoring is a primary source of finance or a secondary source of finance.

29 | P a g e

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Chapter (4) Results and Limitations

4.1 Results

Result of the study shows the following:

1) Most of the companies (14 out of 15) had the liquidity squeeze amongst the first

driver of its decision to discount its receivables, either with recourse or without

recourse.

2) All the companies, with no exception, criticized the high factoring costs compared to

the cost of the traditional bank lending. The high cost of Factoring, according to our

study, is a key reason why the company accepts or refuses the factoring offer. We

conclude that the Egyptian market mainly considers the finance function on the top of

the other services offered by Factors (Debt protection, collection, …,etc). As a matter

of fact this finding comes with the consensus definition of factoring according to the

literature.

3) There is no clear answer whether the factoring is a sign of weakness or a sign of

strength. CFOs had different views of Factoring. Despite none of them denied the

negative perception of Factoring as a sign of weakness by the market itself they

however found no linear relationship between company’s decision of Factoring and

its financial strength. According to the study, the reason why the company seeks the

factoring is the indication of its strength or weakness therefore there is no direct

relationship between the factoring decision and the strength or weakness. For

instance, liquidity is always the reason for external finance. If the liquidity is sought

for a better asset-liability-management or to enhance the return to shareholder or if

the liquidity issue is because of the accelerated growth it would be considered a sign

of strength also in case the company factors the receivables because its investments in

the inventory (To start a new business cycle) is more profitable than investments in

the accounts receivable that can be considered a sign of strength. i.e. the cost of

finance is less than the gross margin. But, in case a company factors the receivables

31 | P a g e

and accepts a higher than average costs of finance, as the case in the factoring,

because it has no other source that will be a sign of weakness according to the study.

4) Factoring is an alternative finance in the eyes of the Egyptian companies. However,

some of the companies looked at factoring simply as a new style of finance not

necessary an alternative to the traditional banking finance.

5) Factoring is a smart finance solution to SMEs it is however equally relevant to both

large corporates and SMEs. It is all a matter of company’s ability to make a sufficient

profit to cover the high finance cost of factoring.

6) Factoring is better geared to serve the companies with exposure to the international

trade as they can take the most out of its different services, mainly the credit

insurance/debt protection.

4.2 Limitation of the research

1) The usual limitations of the qualitative research as the data analysis was based on the

understanding and judgment of the interviewer, myself, which still does not

completely eliminate the personal bias or unintentional direction of the information to

serve a certain conclusion. However, on the other hands, the wide number of the

companies and diversified backgrounds and the results of the research itself proved

otherwise where tow out of four hypothesis were rejected.

2) Interviewed companies are all fall under Egypt Factors criteria which certainly

excludes another segment out of the population which feedback or needs may change

the overall conclusion.

3) Debt protection is restricted in the local market due the absence of information and

credit insurers. It is therefore only presented to exporters in large. This fact can be a

reason why the interviewed companies didn’t highly value this option as they were

32 | P a g e

never offered in the domestic market (Unless for Multinationals which usually needed

it for financial compliance only).

4) The research didn’t properly consider all the important independent variables which

can yet overlap and influence company’s decision to factor or not its receivables like

the degree of awareness, type of industry, proper marketing of the service.

5) This research gives didn’t pay enough attention to the other factors affect the decision

from the supply side “The factors”. For instance some companies may have needed

the factoring but refused at first place by the factors themselves.

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Chapter (5) Recommendations

1) Banks are usually hesitant to lend those firms achieving losses because of producing

below breakeven point even those achieving highly decent profit margin. This attitude

can borne banks to a deadlock situation when one of those firms is amongst its

existing borrowers. Factors as ABL (Asset Backed Lender) can bridge this gap and

intimate with commercial banks, especially with the non-performing loans divisions,

to assist in floating (Financing) the customers which potential business model and

positive contribution margin. This can be done on a transaction-by-transaction basis

and comes in line with Factors interest in the performance of the beneficiary and

buying of quality receivables. On due course, resultant profit (Contribution margin),

can be transferred to lending banks, after recovering of Factor's fees and direct costs

of the producer (borrower). This practice can open up new routes for commercial

banks to outsource part of its recovery process to Factoring companies in a win-win

basis and duly establish a business niche for Factors to operate and integrate with

commercial banks.

2) Another integral business could be the collection service rendered by Factors; a

known practice of commercial banks is to request routing borrower’s receivables

through its channels as a covenant for financing of working capital. Factors have the

advantage and resources of both collection services, client management of borrower's

customers. They additionally have the expertise and convenience to check borrower’s

ledgers unlike commercial banks which use other less efficient ways to verify

customer's compliance because of lack of appropriate resources to check their sales

ledgers.

3) Factoring can cooperate with commercial banks to provide collateral for loans and

thus manage the borrower’s receivable portfolio to the account of the lending bank.

For instance, banks traditionally keep their eyes away from certain type businesses

and services. They do not usually finance high risk industries such as movies,

34 | P a g e

advertisement; startup business is also unlikely to get an easy finance approval from a

commercial bank. This is due to banks' interest in overall borrower's performance as a

going concern whilst risks associated with those types of business might borne

customers to business risks above bank's risk tolerance. Factors can underwrite the

finance of this business upon presence of existing demand over the products

regardless the other risks may escort the business, they are simple receivables

financers. Conclusively, banks can outsource such type of finance to Factors which

will bear the systematic risk associated with the business while banks can indirectly

finance this business through financing the Factor itself.

4) Factors hence need to adapt more to the changing market environment and business

needs. They need to be more innovative and responsive. Product development has

also need to be reconsidered by Factors. For instance, Islamic finance area areas

which Factors may need to develop, adapt, and eventually adopt. Also, the

documentation needed from the borrower need to ease by the factors. Factors also

need to develop smart ways to reduce its cost of fund to be more competitive.

5) Factors need to work hard to reduce its costs and issue letters of guarantees as to

extend its scope of trade finance. That will need a legislative bodies to sponsor this

practice and thus to switch the Factors to be more of trade fiancé houses or a full

fledge commercial financers which will ultimately boost the local economic

activities.

6) Factor can also present the risk rating services to foreign suppliers and domestic

banks especially to the SMEs segment which commercial banks are hesitant to

penetrate.

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References:

Asselbergh, G. (2002). Financing firms with restricted access to financial markets: the

use of trade credit and Factoring in Belgium. European Journal of Finance, 8(1),

2-20.

Bin, J., Locke, P., & Willette, W. (2003). Picking up the gauntlet: Bank competition in

China after World Trade Organization entry. Journal of International Banking

Regulation, 4(3), 247.

Dalton, J. (1936). Factoring. Harvard Business Review, 14(2), 186-199.

Deacon, T., & Whale, M. (2004). When is Invoice Discounting not Invoice Discounting?.

Credit Control, 25(7), 29-31

Elo S. & Kyngas H. (2008). The qualitative content analysis process. Journal of

advanced nursing 62(1), 107-115.

Hillyer, W. (1939). Four centuries of Factoring. Quarterly Journal of Economics, 53(2),

305-311.

Hubbard, K. (1987). Factors' image: underexposed. ABA Banking Journal, 79(11), 72.

Irwin, D. (2006). Chapter 1: Financing entrepreneurship at the regional and local level in

South East Europe. OECD Papers, 6(12), 14-42.

Ittleson, H. (1978). Factoring: Opening new routes in international trade. Management

Review, 67(9), 48.

Krahmer, E. (1990). Forfaiting: The European Edge in Trade Finance. International

Executive, 31(4), 17-18.

Levy, E. (2007). Shining a Light on a Niche Area of Financing in the Current Credit

Market. Secured Lender, 63(6), 50-62.

Mian, S., & Smith Jr., C. (1992). Accounts Receivable Management Policy: Theory and

Evidence. Journal of Finance, 47(1), 169-200.

Miller, C. (2009). Factoring can be a option when traditional financing isn't. Hudson

Valley Business Journal, 19(13), 2.

Palia, D., & Sopranzetti, B. (2004). Securitizing Accounts Receivable. Review of

Quantitative Finance & Accounting, 22(1), 29-38.

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Rea, R., Chilton, J., Crandall, A., Fagerberg, J., Goldberg, D., Greene, G., et al. (1980).

Practitioners Forum. Journal of Accountancy, 150(6), 22-34.

Robichek, A., Teichroew, D., & Jones, J. (1965). Optimal short term financing decision.

Management Science, 12(1), 1-36.

Silverman, H. (1949). Factoring as a financing device. Harvard Business Review, 27(5),

594-611.

Shay, R., & Greer, C. (1968). Banks move into high-risk commercial financing. Harvard

Business Review, 46(6), 149-161.

Soufani, K. (2002). The Decision to Finance Accounts Receivable: The Factoring Option.

Managerial & Decision Economics, 23(1), 21-32.

Ulrich, T. (1978). Financing via accounts receivable. Journal of Small Business

Management, 16(2), 10-13.

V., K. (2005). Metamorphosis of marketing financial services in India. Journal of

Services Research, 5(1), 155-169.

Weisel, J., Harm, N., & Bradley, C. (2003). The Cash Factor. Strategic Finance, 85(3),

29-33.

Zhang, Y. , & Wildemuth, B. M. (2009). Qualitative analysis of content. In B. Wildemuth

(Ed.), Applications of Social Research Methods to Questions in Information and

Library Science (pp.308-319).

Zinner, S. (1947). The Contribution Of Commercial Receivable Companies And Factors

To Financing Small- And Medium-Sized Business. Journal of Finance, 2(1), 76-

90.

(1981). Factoring changes slowly--but it is changing. ABA Banking Journal, 73(12), 92.

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Appendix

The interviews

We used the below bands in the table 3-1 to code the variables of the interviews as shown

below.

Codes (Table 3-1)

Band Growth Governance Liquidity Cash Cycle International trade

Degree of Awareness of Factoring

1 More than 20% Corporate-MNC High Less than 30days More than 70% Professional

2 5%-20% Corporate-National Moderate 30-60 50%-70% Advanced

3 Less than 5% MID Cap-Domestic Marginal 60-120 30%-50% Modern

4 Static Family run corp. Low 120-180 10%-30% Basic

5 Declining One man show style Distress More than 180 Less than 10% Nothing

Table 3-2 below describes the classification of each of the interviewed companies against

the independent variables.

Results of the interview (Table 3-2)

Company Governance (1-5)

SMEs/Corporate Liquidity Growth Cash Cycle

Present finance International trade

Nourmidas 4* SMEs 3 4 5 Equity 4

Enjoy 2 Corporate 5 5 2 Past dues 4

Egyplast 3 SMEs 2 1 3 Banks 3

Olympic group 1 Corporate 1 2 3 Equity/ Suppliers

4

ASEC 3 Corporate 4 5 3 Equity/ Banks

4

Subsea Maritime 4 SMEs 3 2 1 Equity/ Banks

1

TransAfrica 4 SMEs 5 2 2 Past dues 1

Albaddar Packing 3 Corporate 5 4 3 Past dues 4

PPT 3 SMEs 4 1 4 Banks 3

SAPESCO 2 Corporate 4 2 5 Banks/ Suppliers

4

Dytex 2 Corporate 4 2 4 Equity/ Banks

1

Alkan group

2 Corporate 4 1 4 Suppliers/Banks 2

Alamriya casting 2 Corporate 5 4 3 Past dues 4

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Alzhour 5 SMEs 4 1 5 Factoring 4

MAC carpets 2 Corporate 2 2 4 Banks/ Factoring

2

Table 3-3 summarizes the results of the interviews against the dependent variables.

Table (3-3)

Company Degree of

Awareness

Of Factoring

Reason for

Factoring

For domestic or

int. trade

To finance

SMEs or

Corporate

Alternative

finance

Sign of

strength or

weakness

Nourmidas 3 Liquidity International No relation Yes Depending

Enjoy 2 Liquidity Domestic No relation Yes Weakness

Egyplast 3 Liquidity International SMEs Yes Weakness

Olympic group 2 -Protection

-Compliance

International SMEs No Strength

ASEC 3 Refused for

higher cost

Domestic No relation No No relation

Subsea Maritime 2 -Liquidity

-Cash mgmt

International SMEs Yes Depending

TransAfrica 4 Liquidity International SMEs Yes Weakness

Baddar Packing 3 Liquidity International Corporate Yes Depending

PPT 3 Liquidity No relation No relation Depending Strength

SAPESCO 4 Liquidity International No relation Yes Weakness

Dytex 2 -Liquidity

-Protection

No relation No relation Depending Weakness

Alkan group 3 Liquidity International SMEs Depending No relation

Alamriya casting 3 Liquidity No relation No relation Yes No relation

Alzhour 4 Liquidity Domestic No relation Depending Strength

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MAC carpets 1 - Liquidity

Protection

-Compliance

International No relation Yes No relation

Table 3-4 details the results of each of the interviews.

Table 3-4

Company Important comments from the

company

Important comments from the

researcher

Nourmidas - After the downgrading of Egypt’s

sovereign risk, the Factors are

having a better chance to growth the

business mainly to guarantee the

local buyers to the foreign suppliers

as the foreign suppliers are now

more reluctant to grant credit to

Egyptian customers.

- Generally, Factoring is not

attractive in Egypt where the banks

are preferred due to its flexible

business model and less

involvement in operations.

- Factoring is simply a new source of

finance which can increase sales

through extending a more favorable

credit terms to the customers after

finding who can cash the resultant

receivables “The Factor”.

- Factoring can be a sign of weakness

only if you seek it for liquidity due

to restricted access to bank finance

otherwise it can be a sign of

weakness. There is no linear relation

as it is simply another style of

finance.

- Company has a one-man-show

management style and ownership.

- Company has annual sales of nearly

USD40M with a very high level of

inventory and very low financial

leverage (Company is, in large, self

financed).

- Company imports all of the raw

material and exports nearly 50% of the

sales.

- Company depends on its long

relationship with suppliers and high

level of equity to finance its working

capital.

- Company never urged or inclined to

utilize its approved Factoring facilities

which, in our opinion, due to the high

cost and sophisticated procedures.

Also, company’s conservative

management style is still unwilling to

try a new finance option other than the

traditional banking business.

40 | P a g e

- Factoring is not related to the size of

the company but more to the nature

of business itself.

Enjoy - Company would not opt to finance

its operations through Factoring if it

has traditional bank finance. The

reason is the high cost of Factoring.

- Liquidity is the only reason why the

company factored its receivables.

- One advantage of Factoring is its

specialization in receivables unlike

banks which are overlooking the

details.

- Factoring is a sign of weakness of

course considering its high cost.

- Factoring is for both corporate and

SMEs despite SMEs will only need

finance unlike the corporates which

may avail the full service package.

- Factoring has a bad image in the

market as a sign of weakness this

why the company prefers the non-

notification factoring.

- Factoring is an alternative finance.

- The company is a subsidiary of

Citadel group (One of the largest

private equity funds in Middle East).

- The company used to have a huge

market share which has shrunk over

the years due to management and

financial problems.

- Company is having a difficulty to get

bank finance due low credit rating.

- Company’s recent management is

qualified and specialized in corporate

restructuring and re-engineering.

- Company has a critical liquidity issue

as the major suppliers stipulate an

advance payment due to low credit

rating of the company.

- Company is presently financing its

operations through the past dues to

banks and local suppliers.

Egyplast - Factoring is an alternative finance

and the cost is the first driver for

company’s decision to factor its

receivables.

- Factoring may be relevant to those

companies with restricted access to

bank finance.

- Liquidity is company’s only motive

to consider the Factoring option.

- Factoring companies accept a higher

risk this is why it is a valid option to

those with restricted access to bank

finance.

- Factoring is a sign of weakness. It

- Company is a member of a

conglomerate which annual sales is

nearly USD50M. The group has been

achieving 2-digit growth during the

few years despite the slowdown in the

economy.

- Company has a qualified management

and a reasonable level of corporate

governance.

- Company refused to utilize its

approved factoring facility referring

the reason to the higher cost.

41 | P a g e

is more relevant to SMEs.

- Generally Factoring can work where

commercial banks hesitate to play.

Olympic group - Liquidity is always an issue but the

company has enough sources of

finance.

- Supplier credit is not enough to

finance working capital needs

considering the nature of the

industry.

- Factoring advantage is being an off

balance sheet finance and a valid

mean to support the suppliers

through securing or discounting

their dues.

- Factoring is indirect bank finance

after all.

- Factoring is a facility to reinforce

the credit which is not offered by

the supplier as it encourage to

supplier to extend the credit with no

risk on its books.

- Factoring is an important mean for

finance but it is mainly for

protection “Without recourse”,

otherwise, the banking is the place

for finance.

- Factoring is a good mean to open

new markets especially its

specialization in the open account

trade unlike banks.

- Cost of Factoring is higher than

commercial banks which hinder its

growth.

- Factoring is a sign of strength as it

simply reflects company’s

preference to shorten the credit

tenor. Meaning that the cost of

finance thereby is the less than the

gross margin. Otherwise the

company would prefer to wait to

- Company is a lead producer of home

appliances and a subsidiary of one of

the largest groups in the word. It is

listed in the stock market.

- Company refused to utilize its

approved factoring facility without

referring to the reason. However, it is

believed that the company had

problems with the required guarantees

from the lender and some issues with

the Factoring image.

- Company has nearly USD100M total

banking limits and it only utilizes 10%

of which.

- Company’s annual sales exceeding

EGP 1Billion and a bottom line

profitability of EGP18M. The

company employees nearly 6000

employee and owning 18 factories.

- Company’s head of trade finance is

PHD in Finance.

- From the company’s feedback it is

obvious, as a large group with easy

access to bank finance and high

bargaining power, that the company

look at the Factoring more as the

option to finance suppliers or to secure

their dues for the same purpose but

doesn’t consider the option for itself

as a seller.

42 | P a g e

collect its dues.

- Factoring is more relevant to

finance SMEs as corporate can find

it easier to get bank finance.

- Factoring is more suitable to

international trade as it only justifies

the higher cost of Factoring. Only

international trade can utilize the

services rendered by Factors to the

maximum.

- Company is indifferent to notify or

not to notify its buyers if it goes for

Factoring.

- Factoring is not an alternative

finance; it is simply a very

specialized type of finance.

ASEC - Company refused the Factoring due

to the cost compared to what is

offered by other banks.

- No relation between the choice of

Factoring and company’s strength.

It is simple one style of finance and

the only criteria are opportunity cost

and return of sales.

- No relation between the Factoring

decision and company size. The

decision however may be more

linked to the culture and

management style as the Factoring

is relatively new and unknown to

the market and the CFOs.

- Factoring is more relevant to the

domestic market where the larger

part of the investments in the

Accounts Receivables is.

- Factoring is not an alternative

finance, there is no relationship. It is

simply a different type of finance.

- Company is specialized in the

manufacturing of casted products used

by domestic and international cement

factories.

- Company exports nearly 50% of its

production.

- Company has a cash cow business

with no foreseen opportunity for

business growth which makes the cash

flow stable and constant which is

easier for financial planning and

forecast.

- Company is a subsidiary of the Citadel

group, management however, in my

opinion is not judged to be perfectly

efficient or qualified

- Company’s annual sales figure is

around USD30M and total banking

facilities is around USD10M.

- Company hasn’t utilized the approved

Factoring facilities due to the pricing

as they reported.

43 | P a g e

Subsea Maritime - Company has a liquidity issue due

to the fast growth with no enough

internal sources to finance the

growth.

- Cost is the most important

determinant of the Factoring

decision. Cost-benefit analysis is

thereby the only way to judge the

factoring.

- Liquidity is the only reason for

Factoring.

- Factoring can be a sign of strength

if it is used, amongst other facilities,

as a cash flow management

mechanism. If it is used purely and

only for finance as an alternative to

the bank it will be logically as a sign

of weakness. So there is no clear

relation.

- Factoring is more suitable to SMEs

as the large corporates are having

different and wider range of finance

options.

- Company prefers notification

factoring as to put some sort of

pressure on the buyer and to benefit

from the collection option to

manage the debt.

- Factoring is quite unknown amongst

local business circles.

- Factoring is not an alternative

finance it is just a different type of

finance.

- Company is indirectly involved in the

oil business as it rents out vessels to

off shore oil companies to

accommodate their needs and

operations in the sea/ocean located oil

fields.

- Company has a fleet of 8 vessels of

which 3 are state-of-art technology

and equipped with the latest

navigations machines while the other

5 are operating locally due to its

outdated technology (Already fully

depreciated) and accordingly turned to

be unproductive assets and cost

drivers (Expenses of maintenance,

port, royalties, …,etc) and now

offered for sale at a residual cost.

- Company has a one man show style

management and ownership. It is

employing 620 employees with a paid

in capital of USD 26.5M and

generating sales of USD12M

annually.

- Management is experienced and

qualified.

- According to our knowledge of the

company, the reason for the liquidity

unease was not the growth but more of

an operating cash flow due to low

level of operations.

- Company is not an aggressively

utilizing of the approved factoring

facilities, in our opinion, due to a

smooth flow of collection from

overseas operations and the sufficient

short term banking facilities.

TransAfrica - Factoring is a sign of weakness, it is

inflexible, costly and company only

decided to factor the receivables

because it has some difficulties to

get enough bank finance.

- Factoring has an unfavorable image,

- Company is a freezone establishment

and amongst largest 50 exporter in

Egypt. It presently factors its

receivables with CITIBank USA.

- Company is exporting 100% of its

production to leading international

44 | P a g e

it is an alternative finance and

company would prefer of course to

get banking facilities if it has no

troubles with lenders.

- Factoring is a sign of weakness.

- Factoring is more relevant to SMEs.

- Factoring is more relevant to

international trade of course as it is

provides good services for this

purpose like credit investigation

about the buyer and the protection

as well the finance of course.

- Factoring is unknown in the market.

- Factoring is an alternative finance.

brands e.g. Levis, JV, Gertex,…,etc)

- Company has a basic management

structure and style. It has been

weathering tough times and

accordingly has had troubles with

lenders before it came to settle it later.

Total sales figure of the company is

USD20M and employing 2000

employee.

- Company has a liquidity issue mainly

to settle the suppliers which demand

their dues in advance. It utilizes 100%

of its available bank finance which is

not sufficient to its working capital

needs.

- Company cannot change the suppliers

as they are all named by the final

customer due to quality issues. That

fact caused the profit margin to

squeeze with a high bargaining power

of both suppliers and customers.

- Company hasn’t utilized the approved

Factoring facilities due to the

disagreement on the guarantee and

pricing.

Baddar Packing - Factoring accepts higher credit risk

and company approached the

Factoring only for liquidity.

- Factoring is not an alternative to

commercial banks, it is a different

style of financing and it should be

always there next to bank facilities

but yet it is still can be an

alternative finance or a second

resort as it accepts credit risks more

than commercial banks.

- No linear relation between a

company’s strength and its decision

to factor the accounts receivables. It

is on a case-by-case basis.

- Company is a supplier of the cartoon

to many manufacturers and the fresh

food exporters.

- Company has 500 employees and

owners equity of EGP30M with

annual sales of EGP140M.

- Company underwent financial

troubles and has some difficulties to

access the bank credit.

- Company has credit from suppliers

which is not enough to cover its

working capital needs.

- Company utilizes 100% of its

available banking credit.

45 | P a g e

- Factoring is more suitable to

multinational companies than

domestic a local firms considering

the corporate sophistication and

know-how of the multinationals

which can better utilize the different

services and packages offered by

the Factors.

- Factoring is more relevant to

companies involved in the

international trade as they would

thereby utilize the full package. In

another word, without recourse will

be more needed on a foreign client

with no direct relation so the

company will need to insure the

debt while in the local market the

company can better assess its buyers

and accepts their risks.

- Company prefers the non-

notification factoring which comes

in line with the bad image

associated to factoring as a sign of

insolvency.

- Company needs working capital

finance to finance its strategic

inventory levels.

-

PPT - Company achieved 100% growth

over the last 3 years causing a

liquidity issue due to the accelerated

growth quicker than its sustainable

or growth capability.

- Suppliers used to support the

working capital before the

revolution but now they collect the

price in cash or sometimes even in

advance causing a stress on the

liquidity which can hinder the

growth.

- If the company has enough banking

limits it will still factor its

receivables the higher the leverage

the higher the assets the higher the

profit and ultimately the return to

shareholders.

- Factors integrate with banks, it is all

- Medium Size Company and a part of a

larger conglomerate.

- Company’s annual sales is nearly

USD 14M and employing around 350

employee.

- Company has banking facilities of

nearly USD4M and utilizes more than

90% of which.

- All company’s sales are to the local

market.

- Company has a reasonable level of

corporate governance and qualified

management.

46 | P a g e

bank’s money as a forward

integration to finance a new

segment.

- Without assignment and notification

it is not a Factoring it is an invoice

discounting.

- Factoring decision like any other

finance decision. Cost Vs. return.

This is the right view to judge

especially for companies with

growth potential.

- Factoring is a sign of strength due to

above considerations and also

having the company approved credit

facility is a certificate of due

diligence to other creditors.

- Cost the worst thing in Factoring.

- Factoring has no relation to the size

of the company either SMEs or

corporate. However, it has a

negative image in the company as a

sign of poor liquidity.

- Factoring is a secondary source of

finance and can be a main for

SMEs.

SAPESCO - Liquidity is now an issue and banks

are reluctant to support this is why

there is now unprecedented chance

for Factors to grow in Egypt.

- The Factoring has a lot of

operational hassle unlike banks

causing it to be a secondary source

of finance.

- Factoring has an associated image

of weakness and unknown amongst

influential business circles.

- Being SMEs or corporate has

nothing to do with the company’s

decision to Factor its receivables or

not. It is all the liquidity regardless

- A leading service provider to Oil

companies with a regional presence,

decent level of corporate governance

and annual turnover exceeding

USD60M.

- Company deals with largest

commercial banks in Egypt as well as

the leading off shore banks specialized

in the Oil finance.

- Oil sector is facing a noticeable delay

of payment from the Government, the

main buyer and market maker in the

field, causing the average receivable

days outstanding to exceed 270 days

sometime. On turn, unusual financing

needs and liquidity squeeze is

47 | P a g e

the size of the company.

- SAPESCO prefers silent (Without

notification Factoring) over

notification Factoring due to market

unawareness of the business causing

the buyers to refuse to sign/accept

the assignment clause.

- Factoring is costly but liquidity is a

survival no comparison.

- Factoring is more relevant to

international trade especially the

option of the without recourse

finance.

- Factoring is an alternative finance.

overwhelming the sector in Egypt

after the revolution.

- SAPESCO has the bargaining power

to pass the high factoring cost to

suppliers and buyers.

- SAPESCO employees more than 100

employee and it is 35 years length in

business.

- Company’s previously requested non-

recourse factoring which was not

approved due to pricing disagreement.

Dytex - Advantage of Factoring is that it

accepts a higher risk.

- Presence of the receivables itself in

the books of a company is a sort of

weakness since a company of a

higher bargaining power would be

able to negotiate a better credit

terms.

- Factoring is important to Corporates

and SMEs alike since both are

having their own credit needs.

- Non notification factoring is not a

factoring. Factoring has to go with

the notification clause.

- Factoring is very costly and if I

have another finance offer with

cheaper terms I would definitely go

for it. Cost is my first motivation.

- If Factoring is sought only for

liquidity it can’t be any indication

but a sign of weakness, otherwise

why would a company go for

Factoring.

- A textile producer with a decent level

of corporate governance. Company’s

turnover is nearly USD25M p.a.

- Company owns 3 factories and

employing 3,500 workers.

- Company is granted credit lines from

3 commercial banks with total limit of

EGP40M and utilization is exceeding

85% most of the time.

- Factoring business and different

services offered are perfectly clear to

the client.

48 | P a g e

- Factoring is not a secondary

finance. It is simply one type of

financing.

Alkan group - Factoring is not a secondary

finance. It is simply one type of

financing.

- Company seeks Factoring only for

finance as the demand and growth is

higher than company’s ability to

fulfill.

- Company is capable to absorb any

given bank finance and if an

additional bank finance is available

Factoring will be still regarded as a

valid option as long as the cost of

Factoring is less than the return on

sales. Of course, this is subject to

high growth rate and availability of

demand. If no demand is available

so the less costly option will of

course be preferred.

- One more benefit of Factoring is

being an off balance sheet finance

which replenish company’s

financial statements in the eyes of

suppliers and other lenders.

- Factoring for the company is only a

source of liquidity to finance

growth, nothing else.

- Factoring is more suitable to SMEs.

- Group of companies which annual

sales is reported to exceed USD1Bi.

They are the sole agent and distributor

of many international brands (Kia,

Renault, Yamaha,…,etc).

- Company has a high level of corporate

governance.

- Company has 2 digit growth and most

of the time they seek finance to attend

the demand over its products which is

higher than company’s financial

(Including banks) capabilities.

- Company’s management style is

aggressive either toward growth

targets or financing.

- Company has banking facilities of

USD100M and utilizes more than

98% of which.

Alamriya casting - Supplier finance used to be

sufficient unless the decision to use

all the operating cash inflow to

finance a capital expansion causing

a negative working capital and

- Company has annual sales of nearly

USD10M and reporting operating

losses due to production below the

breakeven point.

49 | P a g e

ongoing state of illiquidity which is

expected to last for years.

- Company has no facilities from the

commercial banks.

- Cost is the only factor to affect

company’s decision to factor its

receivables or not. If bank finance is

available company will only refer to

the comparative cost.

- Factors are only middleman

between the bank, which is the main

lender, and low risk rating

borrowers.

- Factoring is a very costly finance

option it is however an acceptable

cost to pay for the liquidity which is

essential for operations to continue.

- No relation between Factoring and

company’s strength, however, the

market doesn’t think the same way.

Market considers the Factoring as

an indication for a bankruptcy,

Factoring company need to build a

favorable image for its business

especially in Egypt.

- Factoring has no relation to the size

of the company. It is however more

related to the nature of business.

- Factoring, like any other financial

institution, can facilitate the

international trade.

- Company prefers the non-

notification factoring considering

the unfavorable image of Factoring

as a sign of weakness in the market.

- Due to cumulated losses, company is

having a negative equity.

- The company has a professional

management specialized in the

corporate restructure and re-

engineering.

- Company is a subsidiary of Citadel

group.

- Company exports nearly 40% of its

production.

- Company has no access to bank

finance and having low credit rating.

50 | P a g e

- Factoring is an alternative finance.

Alzhour - Company sees Factoring as a main

source of bank finance. It sees

factoring as more flexible, risk

taker, and supporting. Nonetheless,

considering the business model of

the company it finds it a

disadvantage of factoring as it

doesn’t submit letters of guarantee.

- Company sees Factoring only as a

mean of finance and has no other

consideration for any other type of

business.

- Company complaints from the high

cost of factoring.

- Factoring is more suitable to SMEs.

- There is no relation between

company’s engagement in the

international trade and its factoring

decision. Factoring is equally

important to both domestic

companies and those involved in the

international trade.

- Company prefers the non

notification factoring as the

notification is sometimes refuse by

the customers considering the

market culture.

- Factoring is an alternative finance.

- Alzhoor is doing business for over 13

years. The company is an assembler,

supplier, importer, and producer of the

valves of the main water and sewage

pipes which is consumed mainly by

the government or main contractors

and real estate developers.

- Alzhoor has been using the factoring

as the main source of finance since

nearly 3 years.

- This segment sually has difficulty to

access the bank finance.

- Company’s sales increase from EGP

14 million to EGP39 millions in 3

years time attributing most of which to

the incremental working capital it got

from the external finance, mainly the

factoring.

- The company has 50 employees and

has EGP8M utilizing 100% of which.

- Company has no trade credit.

- Company’s average days out standing

of receivables 6-9months.

51 | P a g e

MAC carpets

- Factoring is an alternative finance

and only sought as to back the short

term bank credit or else to

compensate against shortage in the

available bank finance.

- The debt protection is an important

function of factoring and factoring

without a debt protection is not a

factoring and will lose if compared

to the traditional and less costly

bank finance.

- Factoring is unusual sort of finance

with the option to guarantee the

debts and also to window dress the

financial statements after getting rid

of the investments in the accounts

receivables.

- Factoring is taking over the finance

of the credit sales to strategic

clients.

- Supplier finance is company’s

favorite type of finance, but not

sufficient.

- Company’s strength or weakness

has nothing to do with its decision

to factor the receivables. There is no

linear relationship. It is simply one

method of finance such like all the

other available methods.

- Factoring is more suited to

companies involved in international

trade.

- Company prefers the notification

factoring but some clients refuse to

assign the debts to lenders.

- The key determinant of the

factoring decision is similar to any

other finance decision, no

difference; it is cost-benefit-

analysis.

- Company is one of world’s largest

producers of carpets. It is 30 years in

the business with a paid-in capital of

USD 40M and total equities of

USD60M.

- Company’s has no business growth

due to its large size and the low

growth of the industry itself and

achieving annual sales of nearly USD

150M.

- Company has 6000 employees and

enjoys a good market reputation and

easy access to bank finance.

- Company has short term credit limits

of EGP550M and utilizing 90% of

which.

- Company is granted a total factoring

limits of nearly USD 20M and utilizes

nearly 40% of which.

52 | P a g e

- No relationship between company

size and factoring decision it is all a

cost Vs return.

53 | P a g e

1 Nourmidas 2010 2011 2012

Cash growth -91% 104% 36%

Invetory growth 54% 33% 9%

Receivable growth -7% 26% 4%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 2.24% 3.31% 4.49%

ACID test (Current Assets-Ineventory/Current Liabilities) 77.25% 77.58% 61.91%

Current ratio (Current Assets/Current Liabilties) 215.90% 211.22% 207.08%

Account receivable days outstanding 160 158 221

2 Enjoy 2010 2011 2012

Cash growth 21% -33% -53%

Invetory growth -17% 14% -33%

Receivable growth -18% 61% -40%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 16.40% 6.82% 2.00%

ACID test (Current Assets-Ineventory/Current Liabilities) 68.94% 60.16% 22.04%

Current ratio (Current Assets/Current Liabilties) 146.70% 115.44% 44.98%

Account receivable days outstanding 62 69 97

3 Egyplast 2010 2011 2012

Cash growth 77% -83% 6029%

Invetory growth 12% 46% 28%

Receivable growth -6% 31% 17%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 2.01% 0.41% 17.03%

ACID test (Current Assets-Ineventory/Current Liabilities) 39.55% 60.53% 62.78%

Current ratio (Current Assets/Current Liabilties) 62.98% 101.72% 98.43%

Account receivable days outstanding 113 122 112

4 OGFI 2010 2011 2012

Cash growth 0% -11% 289%

Invetory growth 24% 34% -40%

Receivable growth 20% 5% -57%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 11.96% 8.48% 46.50%

ACID test (Current Assets-Ineventory/Current Liabilities) 55.89% 40.44% 68.35%

Current ratio (Current Assets/Current Liabilties) 106.20% 93.92% 113.54%

Account receivable days out standing (Accounts Receivables/SALES/365) 55 55 36

5 ASEC 2010 2011 2012

Cash growth NA -40% -48%

Invetory growth NA -9% 34%

Receivable growth NA -5% -30%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 5.76% 3.49% 1.74%

54 | P a g e

ACID test (Current Assets-Ineventory/Current Liabilities) 39.66% 37.66% 34.33%

Current ratio (Current Assets/Current Liabilties) 73.20% 68.43% 73.49%

Account receivable days outstanding 74 62 53

6 SUBSEA 2010 2011 2012

Cash growth 7% -31% -87%

Invetory growth -25% 30% 3%

Receivable growth 9% -73% 90%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 240.26% 115.38% 5.96%

ACID test (Current Assets-Ineventory/Current Liabilities) 590.34% 186.23% 64.56%

Current ratio (Current Assets/Current Liabilties) 628.83% 220.98% 79.14%

Account receivable days outstanding 163 94 161

7 TransAfrica 2010 2011 2012

Cash growth -48% -86% 921%

Invetory growth -13% -4% -19%

Receivable growth 41% -1% 9%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 1.29% 0.18% 7.70%

ACID test (Current Assets-Ineventory/Current Liabilities) 76.85% 73.09% 324.50%

Current ratio (Current Assets/Current Liabilties) 110.03% 104.77% 430.22%

Account receivable days outstanding 148 103 98

8 Albaddar 2010 2011 2012

Cash growth -44% -84% -30%

Invetory growth -48% 65% -23%

Receivable growth -8% -27% 3%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 4.47% 0.53% 0.33%

ACID test (Current Assets-Ineventory/Current Liabilities) 96.92% 61.60% 54.54%

Current ratio (Current Assets/Current Liabilties) 133.95% 106.87% 84.88%

Account receivable days outstanding 151 140 115

9 PPT 2010 2011 2012

Cash growth NA 1300% -30%

Invetory growth NA 41% 70%

Receivable growth NA 106% 48%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 0.22% 1.25% 0.55%

ACID test (Current Assets-Ineventory/Current Liabilities) 85.91% 79.08% 78.98%

Current ratio (Current Assets/Current Liabilties) 154.78% 119.19% 121.94%

Account receivable days outstanding 73 116 135

10 SAPESCO 2010 2011 2012

Cash growth 72% -31% -21%

Invetory growth 5% 10% 14%

55 | P a g e

Receivable growth 6% -13% 34%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 16.92% 14.60% 10.33%

ACID test (Current Assets-Ineventory/Current Liabilities) 74.50% 76.97% 84.97%

Current ratio (Current Assets/Current Liabilties) 92.42% 101.74% 110.09%

Account receivable days outstanding 150 157 200

11 Dytex 2010 2011 2012

Cash growth 47% 77% 23%

Invetory growth 70% -2% 6%

Receivable growth 33% 22% 71%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 3.32% 5.02% 5.03%

ACID test (Current Assets-Ineventory/Current Liabilities) 38.81% 39.16% 43.57%

Current ratio (Current Assets/Current Liabilties) 130.89% 116.06% 110.11%

Account receivable days outstanding 41 41 56

12 ALKAN 2010 2011 2012

Cash growth 3% -5% 1%

Invetory growth 35% -18% -12%

Receivable growth 64% 8% 11%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 3.20% 3.44% 3.22%

ACID test (Current Assets-Ineventory/Current Liabilities) 77.44% 83.19% 85.51%

Current ratio (Current Assets/Current Liabilties) 128.46% 130.17% 123.85%

Account receivable days outstanding 62 98 75

13 Amriya 2010 2011 2012

Cash growth -91% -53% 180%

Invetory growth -33% -3% -24%

Receivable growth 18% -3% 9%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 0.90% 0.43% 1.08%

ACID test (Current Assets-Ineventory/Current Liabilities) 36.75% 38.50% 37.16%

Current ratio (Current Assets/Current Liabilties) 76.17% 77.66% 63.80%

Account receivable days outstanding 99 91 138

14 Alzhoor 2010 2011 2012

Cash growth -29% 30% 352%

Invetory growth 105% -7% 42%

Receivable growth -8% 115% 91%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 5.78% 3.08% 7.28%

ACID test (Current Assets-Ineventory/Current Liabilities) 130.48% 111.83% 101.15%

Current ratio (Current Assets/Current Liabilties) 242.01% 154.29% 132.74%

Account receivable days outstanding 58 107 121

56 | P a g e

15 MAC group 2010 2011 2012

Cash growth 414% -35% -27%

Invetory growth 2% -10% 6%

Receivable growth -14% 32% 21%

LIQUIDITY ANALYSIS

Cash ratio (Cash/Current liabilties) 2.88% 2.26% 1.45%

ACID test (Current Assets-Ineventory/Current Liabilities) 19.78% 29.62% 30.44%

Current ratio (Current Assets/Current Liabilties) 110.68% 128.23% 122.04%

Account receivable days outstanding 52 67 75