Factoring: Concept, Evolution

Developments and Challenges

Peter Brinsley

Director, POINT FORWARD LTD

Evolution - Early History

• Origins in international trade. Factors acting as agents.

• “Modern” factoring started in the USA in the 20th Century. Mostly textile business.

• 1960’s – the concept was exported back to Europe by American factors

• 1963 : Foundation of International Factors Group

Recent History

– Significant growth in Europe – Start of invoice discounting

1980s

Recent History

– Significant growth in Europe – Start of invoice discounting

– Development in Asia, Central East Europe, Latin America – Asset Based Lending (ABL) in USA and later also UK – Less full service / more focus on receivables financing

alone : evolution towards “Commercial Finance”

1980s

1990s

Recent History

– Significant growth in Europe – Start of invoice discounting

– Development in Asia, Central East Europe, Latin America – Asset Based Lending (ABL) in USA and later also UK – Less full service / more focus on receivables financing

alone : evolution towards “Commercial Finance” – Further growth / more Bank-driven – Diversity of products : Factoring with recourse, non-

recourse, Invoice Discounting, Single invoice factoring, ABL, Trade Finance Products such as Reverse Factoring, Supply Chain Finance

1980s

1990s

2000s

Commercial Finance today

Invoice Finance Asset Based Lending Trade Finance products

Non-recourse Factoring Receivables and other Assets

Reverse Factoring

With Recourse Factoring Supply Chain Finance

Invoice Discounting SWIFT BPO (Bank Payment Obligation)

Portfolio & Transaction based

Portfolio based Transaction based

Common to all forms of Commercial Finance : It’s SECURED AND MONITORED FINANCING

Evolution of World Factoring Turnover

0

500

1000

1500

2000

2500

Billions USD1980

€50bn

1990 2000 2012

€200bn

€600bn

€2120bn

Africa & Middle East

32 (2%)

Asia 581 (28%)

South America 93 (4%)

North America 91 (4%)

Europe 1.257 (59%)

(1.173 EU)

Australia & NZ 64 (3%)

Total World: €2.119 billion (+8%) Source: IFG GIAR 2012

Factoring in Africa

0

5,000

10,000

15,000

20,000

25,000

0

500

1000

1500

2000

2500

3000

2007 2008 2009 2010 2011 2012 2013

Egypt Mauritius Morocco Tunisia South Africa

What do we mean by “factoring” ?

• A purchase of receivables by the financier – Factor takes ownership of the debt

• Target market is SMEs / mid-corporates • Suitable for B2B trade • Different from lending against receivable • Factoring allows you to finance more

because of risk mitigants – Greater understanding & close monitoring of the

receivable

What do we mean by “factoring” ?

• Factoring offers - Finance - Receivables administration - Collections - Protection against bad debts (= non recourse)

Developments

• Global shift to open account trade Global imports (Trn USD) 50

40

30

20

10

0 2011 2020

Open account Documentary trade

18%

82%

14

9%

91%

31 +8.7%

Revenue pools Bn USD

100

80

60

40

20

0 2011 2020

Open accounts Documentary trade Payments

10.5

22.9

5.2

31.2

25.0

13.5

38.7

+80%

69.6

Source: SWIFT, ICC, ITC, BCG

Developments

• Traditional trade instruments stagnating

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

in b

illio

n U

SD

LCs World Factoring Volume Open Account

14.000

2.730

1978 - 2012

Developments

• Factors expanding the product range and looking for new opportunities – ABL, SCF, Single invoice factoring – Interest in emerging and developing markets – Opportunities for significant growth and

revenues

• Initiatives with factoring legislation in Africa – IFG’s model law, OHADA

Challenges: for traders

Access to working capital – Banks not lending – Securities demanded by Banks not attractive – Loans, if available, do not reflect growth

Challenges; for Factors

Legal Environment 1. There is a need for clear

and non-disputable laws on assignment of present and future receivables

2. There is a need for priority rules in favour of the factor in case of bankruptcy of the client

Challenges: for Factors

Regulation – there’s good and there’s bad

X

Allows competition Applies minimum standards Helps position a credible and sustainable industry Excessive control Restricts competition Stifles innovation Cost and resource

Challenges: for Factors • Industry image • Marketing • Education

• of the market • your parent bank • your staff

• People • Skills • IT systems

Challenges: for Factors • Credit information • Credit insurance • Risk processes and procedures • Getting your money back

Thanks for your attention Merci pour votre attention

Questions ?