Vasilijs Karpovs, Member of the Board of AS Expobank
The effect on economy in general and national economy caused by the pandemic has promoted demand for factoring. While at the end of the last year the factoring portfolio of Latvia comprised 136.9 million euros (by 15.3% less than at the end of 2019), the indicator of Q1 of this year reached already 147 million euros, whereas in Q2 – 172 million euros. The restrictions implemented in the state, which have affected trade and other sectors, have also affected invoice settlement possibilities, and in such cases factoring is a suitable solution.
Due to restrictions of business activities, some delays in settlement of invoices may arise, and factoring, which basically means bank financing against the invoice, allows retaining relations and continue cooperation between the provider of goods or service and the buyer. With assistance of the bank, the seller immediately receives a payment for own goods (up to 90% of the invoice amount), and, when the invoice due term comes, the buyer pays to the bank, instead of the supplier. The seller will receive the remaining amount, when the buyer makes full settlement of the invoice. It has to be taken into consideration that the bank deducts the financing already issued against the invoice and costs from the invoice settlement amount, and the remaining amount is transferred to the borrower.
The factoring portfolio has been increased not only by the effects of the pandemic, but also the rapid increase in GDP – experts have already indicated that, despite the lockdown, GDP may reach the previously expected 5% this year, and also in the next year the economic growth may reach 5%. The sales volumes increasing, also necessity for financing arises, and factoring allows retaining sufficiency of the financial flow. Ideally, if buyers or partners can timely foresee that there are risks for short-term settlements, the provider of goods or services can issue an invoice with a longer payment term and receive funds from the bank immediately.
Large companies have more extensive opportunities to receive a credit or credit facility due to their existing security – assets that can be pledged at the bank etc. Whereas factoring is just as good solution for companies that do not have such assets. Factoring is suitable both for large companies, and SMEs. The main aspect is not the amount of invoices, but the number of invoices, as processing of each invoice requires a certain amount of time. The bank has to make an equal effort to serve an invoice for 100 euros, and for 100,000 euros.
When deciding on whether the factoring service shall be granted, the bank analyses the customer’s financial status, and also assesses the potential buyers. The essence of factoring is that if the bank issues financing against the invoice, it is essential that the invoice is paid within the specified term and in full. It depends exactly on the buyer. Also the cooperation history is assessed, namely, it is important for the bank that the customer has already established positive collaboration with its customers – this helps analysing also the past payment discipline.
It is important to note that factoring can be used also by companies that already have credit liabilities; moreover, these services do not have to be received in one bank – the credit can be received in one bank, and factoring – in another. Actually, for companies that already have credit liabilities factoring can serve as a tool of additional financing in order to optimise the cash flow and current assets. Of course, it has to be coordinated with the financial institution the cooperation is commenced with earlier. It is also legally possible to separate those debtors, who will make payments within the framework of factoring.
Banks, also AS Expobank, offer both domestic, and export factoring. Also the financial institution Altum, which we cooperate with, has programmes that provide for direct support to exporters and can be used in case of factoring. The main difference between both types of factoring is that customers of domestic factoring sell their goods or services to buyers in Latvia. In case of export factoring, as its name already shows, customers are located abroad. Assessing requests for export factoring, higher legal and AML risks remain.
Despite the fact that in the recent months the factoring portfolio has increased in Latvia, there is still room for growth. Probably, not all are aware of the advantages provided by this service. In addition to stability of the financial flow, factoring helps to discipline recipients of goods and services to some extent. If a customer has to make payments to the bank, frequently there is a completely different attitude – payments are settled timely and all requirements are met. No company wants to damage their reputation or payment history in relations with the bank.
Under the changing conditions of the pandemic, when it is difficult to make long-term forecasts and assess all risks, factoring is a suitable financial instrument, which allows planning and continuing the economic activity in a long-term perspective, regardless of the restrictions. Currently, when a huge number of companies experience difficulties with observing payment deadlines, which is caused by disruptions and breaks in the logistics chain, such an instrument is particularly important and necessary.
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Head of PR and marketing at AS Expobank