CC BY
87
УДК [336.717:336.77];[339.3+339.5](437.1/2)
R. Zeman, L. Polanecky
FACTORING AND ITS USE IN DOMESTIC AND FOREIGN TRADE IN THE CZECH REPUBLIC
Abstract. This article aims to analyze an alternative way of financing through factoring. Factoring as an alternative source of financing in the Czech Republic is not much used and this is due to the fact that businesses are not aware of this method of financing. The general characteristics of factoring, including its main conceptual principles are presented. The ways of factoring usage, supported by the examples from practice, are described. The factoring services in general and the criteria, on which the factoring classification is based, are considered. Two types of factoring in the Czech Republic both at the domestic and foreign markets are analyzed. The factoring course during the last seven years, alongside with the determination of the volume of factoring during certain periods of time, is shown.
Key words: factoring, trade credit, regression, Czech Republic, foreign trade, domestic market. Introduction
Factoring means the method of funding that is based on the sale of short-term collective claims. These receivables arise from the sale of goods or services. The purchase of receivables is carried out by a specialized factoring company or with a factor usually without a regression (a recourse to a supplier if the customer does not pay). Thus factoring is the instrument, through which the operating capital is received, particularly in the business sector in cases such as when it is necessary to satisfy customers and their requirements for postponement of the due date to overcome seasonal fluctuations or to decrease the payments to the suppliers [1].
Factoring is the purchase of receivables carried out by a factor satisfying the following conditions.
1. The maturity of the receivables is no longer than 180 days (this condition is likely to vary depending on a factor).
2. The claim was based on the commercial loan and it is not secured.
3. The rights of third parties are not connected with a claim.
4. The assignment of receivables to another lender is not excluded.
The factoring commission is made up of risk margins and also with the amount that is used to cover the administrative costs of factoring company [2].
The price is a factoring rate, covering not only the usual discount, but all the costs for the business case and the risk premium corresponding to the rating of the relevant borrower. Given that it is a purchase of a large quantity of small claims in practice, the characteristic features of factoring are carrying out the mass repurchases, the standardization of the procedures and the long-term cooperation of the factoring companies and their partners [3].
The Course of the Factoring Case
After checking the credit worthiness of the suppliers and the customers, there will be an application of the receivables factoring between the factoring company and the supplier and it will be followed by a subsequent contract of factoring. In this contract, the contractor agrees that the claims arising from the customers will be assigned to the factoring company. On the contrary, the factoring company undertakes to provide the advances in an agreed amount for the assigned claims to the supplier immediately after receipt of the invoices and then to take care of their payment [4]. The next step takes place between the supplier and the customer; this step is the delivery of the goods and the subsequent issuance of the invoice by the customer. In the case of raising an invoice by the customer, the next step against the supplier may take place; that step is the assignment or the assignment of the receivables from a supplier to a factoring company (factor). The pre-financing by a factoring company towards the customer occurs after the assignment of the receivables. After this, the collection of the receivables is performed when they are due from the customer part to a factoring company. The last step is the receivable payment or the guarantee payment by the factoring company to suppliers [5].
Factoring is distinguished by the assumption of credit risk by a factor, it is distinguished into:
1. The proper (non-recourse): a factoring company (a factor) bears the risk of the nonpayment of the receivables, and therefore it has no recourse (a regression) opportunity of the seller if the buyer fails to pay the claim.
2. Improper (regression): in case of an improper factoring, a seller bears the risk of those non-payment receivables carries the risk of the non-payment of receivables. The supplier usually collects a deposit of 80-90 % of the nominal value and the balance on the payment by the customer [6].
Factoring Breakdown
The factoring may be classified according to several criteria: by taking over the credit risk factor, the number of the agreed buyouts, the method of assignment of receivables, by the seat of suppliers and customers.
There are the following types of contract buyouts:
- bulk Factoring: it refers to the purchase of only a single claim or only one package. This factoring is usually the proper one;
- off-Balance Factoring: a factor carries out a purchase of all receivables of his client, up to a predetermined line of credit, which is released by each payment from the customer. It acts an improper factoring [2]. Factoring by way of the assignment of receivables.
The Apparent Factoring: the customer knows the assignment to the factor and pays for a delivery directly to the factor.
Silent (Hidden) Factoring: the customer is not informed of the assignment and therefore he/she pays the claim to the contractor who sends a received payment subsequently to the factor in the prepaid amount, interest and other agreed charges [2].
The Types of Factoring by the Location of the Registered Supplier and Customer:
- domestic Factoring: when the supplier, customer and the factor reside in the same country; then it is the domestic factoring;
- international Factoring: we are talking about international factoring, that is if the supplier, the purchaser and the factor are not located in the same country [3].
The Method
This article deals with factoring and its use in the Czech Republic and in foreign trade; it is divided into two parts. The first part is theoretical, which discusses factoring in general and it records the individual factoring operations; it also shows the breakdown of the various aspects of factoring from different points of view. This theoretical part is treated as a literary review of the scientific literature using a variety of materials that are freely available to financial institutions, both on the website and in paper form at the branch.
The second part of the article is an application part that gives information about the domestic and export factoring from different points of view. Furthermore, there are examples in an application part that follow the information from the theoretical part of the article. The application part is formed by using the materials of those companies that specialize in factoring; another source of information and a data source is the FCI (Factors Chain International). The FCI is a global network of leading factoring companies. Analytical, descriptive and comparative methods were used while writing this article.
The Application Part
The use of factoring from the perspective of the companies is different. Factoring is used by the companies that produce and supply their products to the domestic market, but also by the companies that export their products abroad as well. Factoring is especially useful for the companies with the requirements for working capital, whose products have a quick turnaround.
Domestic Factoring. Domestic factoring is the purchase, financing, management collection of those short-term receivables arising from the deliveries of goods or services to domestic customers. The goods are delivered with a deferred payment up to 180 days based on the free supply of credit.
The Principles of Domestic Factoring.
1. Factoring concludes a domestic factoring agreement with the supplier.
2. The supplier provides the customer with the goods, including an invoice, which contains an assignment clause informing the customer that the receivable is assigned to a factoring company.
3. The supplier assigns the receivable to the factoring company; (the supplier has the option of electronic receivable assignment).
4. KB Factoring pays the so-called advance to the supplier, usually in an amount of 70-90 % of the receivable value.
5. The customer pays the receivables in full to the factoring company.
6. The receivable is settled with the supplier based on the payment receipt.
Export (International) Factoring. There are two common export factoring forms.
Export Factoring: it is characterized by the receivables assignment from the domestic suppliers to the foreign customers. The assignment is performed by two factors: an import and an export factor. This operation is performed via a factoring company with the seat in the supplier's country (export factor) and the factoring company located in the buyer's country (import factor) as part of an international chain of factoring companies.
The export factor's main responsibility is financing the seller through prepayments and submitting the receivables to the import factor. The import factor collects the debts and usually provides credit protection in case of financial inability of the buyer [7].
The Export (International) Factoring Principles:
- signing the export factoring contract by the exporter, which includes all receivables. In signing, this factor becomes responsible for all operations related to factoring;
- in FCI export factor finds an import factor from the country, where the goods are exported to. The receivables are assigned to the import factor with this process;
- the import factor assesses the credibility of the buyer and establishes the credit requirements;
- the export factor provides the deposit (mostly 80 % of the invoice amount) at the time of the delivery of the goods;
- the entire invoice amount is collected by the import factor at due date and transferred the amount to the exporter;
- if the invoice is not paid by the buyer within 90 days after the invoice due date, the import factor is obliged to pay the entire invoice amount (in the case of non-recourse factoring);
The second possibility of factoring in the Czech Republic (domestic) is represented in the recovery of claims by the exporter directly from the foreign customers. The factoring company commitment is the payment of the claims to the foreign importers; the factor pays the insurance premium.
A tendency of providing international factoring with only one factor, especially within the European Union, where the barriers between countries are not as significant as they are in other countries, has been recently shown. It is suitable for the funding in any industry, especially in the clothing, electronics, electrical and food industries (tabl.) [7].
Cumulative Factoring - the years Turnover of FCI Members, EUR
Type of factoring, years 2007 2008 2009 2010 2011 2012 2013 12/13
World domestic factoring 1153131 1148943 1118100 1402331 1750899 1779785 1827680 3 %
World international factoring 145996 176168 165459 245898 264108 352446 402798 14 %
World in total 1299127 1325111 1283559 1648229 2015007 2132231 2230477 5 %
The latest statistics indicate that there was a slight increase by almost 5 % in the worldwide factoring volume in 2013. We can say that the factoring industry generally weathered the financial crisis much better than other institutions ranging in the financial sector. The statistics show that domestic factoring amounted to about 1.828 billion EUR, which is 82 % of the total. When comparing the domestic factoring and the international (cross-border) factoring, which amounted to 403 billion Euros, representing 18 % of the total, and we can say that factoring grew annually by 15 % from the beginning of the beginning of the financial crisis, which amounts to roughly one billion Euros in the total of the annual volume.
Currently, the factoring industry is in such a stage, when it continues its growth, although not in a very fast pace, as it was during the first years after the onset of the financial crisis (figure).
Cumulative Factoring - The Turnover of the FCI members, EUR [Own world Domestic Factoring World International Factoring World in Total]
The following chart demonstrates the horizontal development of the factoring turnover of members of Factors Chain International (FCI) during the last seven years.
As for domestic factoring, we can see within approximately similar numbers from 2007-2009 years. In 2010 and 2011, there is an obvious increase in the factoring turnover from 1.118.100 EUR to 1.779.785 EUR. From 2011 to 2013, the factoring moves approximately at the same level. The last recorded data from 2013 shows a turnover of 1.827.680 EUR.
International factoring has similar characteristics to those of domestic factoring, i. e. in the first three years of the period, it ranges approximately at the same level and the higher turnover growth of international factoring was recorded in 2010, when a factoring turnover reaches 245.898 EUR, compared to 2009, where a turnover of the international factoring amounted to 165.459 EUR. The latest recorded information on International Factoring in 2013 gives a turnover of 402.798 EUR.
The statistics provides a general view of the factoring turnover of the FCI members in 2013, i. e. 2.230.477 EUR.
Factoring Example
Factoring companies provide a wide range of services that involve financing and debt management. This provision of various services is reflected in the overall cost of the service and it influences the decisions of financial managers.
A sportswear supply has been chosen as a model example:
A company X regularly supplies sportswear to a wholesale chain Y. The company X has contracted with a factoring company to the all their supplies: Trade receivables (invoiced amount) = = 300 000 CZK; Due date = 40 days; Deposit = 80 % of the invoice amount; Factoring fee = 0.8 %; Interests expenses = 1 m pribor 2.45 + 2 % p. a. risk charge.
The calculation of the total costs related to factoring and the application of the example is given:
XXX Company issues an invoice to a customer. The invoice is assigned to the factor, who immediately pays the deposit at the amount of 80 % (from 300.000 CZK = 240.000 CZK). The customer pays the invoice to the factoring company (300.000 CZK). The factor transfers the remaining amount to the XXX Company. The amount is reduced by the factoring costs: Factoring fee = 0.008 • 300.000 = = 2.400 CZK; Interests costs = 0.0445 • 300.000 • 40/365 = 1.463 CZK; Collection (supplier) in total = = 300.000 - 2.400 - 1.463 = 296.137 CZK; Factoring company pays the seller 56.137 CZK.
Conclusion
Judging about the development of the factoring services in the Czech Republic, we can say that we are doing very well. The high level of the services of the factoring companies (as well as the turnover growth of factoring reflecting the popularity of this product for small and medium-sized businesses) is the evidence.
Talking about factoring at the international level, there are some legislative changes, especially of the legal documents such as the UN Convention on the Assignment of Receivables in International Trade, the Unidroit Convention on International Factoring.
Regarding the choice of the way of financing international trade, a company always decides according to the amount of funds that the company may gain by a specific method, in terms of the costs of the method, the risks that are associated with it and by its flexibility. All assumptions must be carefully considered so that the company is able to make a good decision and obtain the necessary funding.
We can say that choosing factoring as a possible method of financing is suitable for suppliers that offer unsecured business loans. These loans (with maturity from 30 to 90 days) are provided to a stable group of customers. These are the goods with a quick turnover.
RЕFERENCES
1. Poloucek S. Bankovnictví [Banking]. Prague, C. H. Beck, 2006. 716 p.
2. Marek Petr. a kol. Financemi podniku [Finances of an enterprise]. Prague, Ekopress Publ., 2009. 634 p.
3. Rejnus O. Financní trhy [Financial markets]. Ostrava: Key Publishing, 2010. 659 p.
4. Machková H., Cernohlávková E., Sato A. Mezinárodní obchodní operace [International business-operations]. Prague, Gradapublishing, 2007.
5. Zbynek R. a kol. Penezní ekonomie a bankovnictví [Monetary economy and banking]. Prague, Management Press, 2008, 627 p.
6. Kislingerová E. a kol. Manazerské finance [Management finances]. Prague, C. H. Beck, 2007. 745 p.
7. Factors Chain International. Available at: http://www.fci.nl/home.
The article submitted to the editors 6.10.2014
INFORMATION ABOUT THE AUTHORS
Zeman Robert - Czech Republic, 37001, Ceskü Budejovice; Ceskü Budejovice Institute of Technology and Business; PhD; Head of the Department "Economics and Management"; zeman @mail.vstecb.cz.
Polanecky Lukas — Czech Republic, 37001, Ceískü Budejovice; Ceskü Budejovice Institute of Technology and Business; PhD; Assistant of the Department "Economics and Management"; polanecky@mail.vstecb.cz.
Р. Земан, Л. Поланецки
ФАКТОРИНГ И ЕГО ПРИМЕНЕНИЕ ВО ВНУТРЕННЕЙ И ВНЕШНЕЙ ТОРГОВЛЕ ЧЕШСКОЙ РЕСПУБЛИКИ
Приведен анализ альтернативного способа финансирования с помощью факторинга. Факторинг как альтернативный источник финансирования в Чешской Республике используется не часто, т. к. бизнес-субъекты недостаточно осведомлены об этом методе финансирования. Представлены общие характеристики факторинга, в том числе его основополагающие принципы. Описываются способы применения факторинга, подкрепленные примерами из практики. Рассматриваются факторинговые услуги в целом, и критерии, на основании которых факторинг классифицируется. Более подробно проанализированы два вида факторинга в Чешской Республике: на внутреннем рынке и во внешней торговле. Показано развитие факторинга за последние семь лет, с определением его объёмов в определенные периоды времени.
Ключевые слова: факторинг, дебиторская задолженность, регрессия, Чешская Республика, международная торговля, внутренний рынок.
СПИСОК ЛИТЕРАТУРЫ
1. Poloucek S. Bankovnictví / S. Poloucek. Praha: C. H. Beck, 2006. 716 s.
2. Marek P. Financemi podniku: studijní prúvodce / P. Marek a kol. Praha: Ekopress, 2009. 634 s.
3. Rejnus O. Financní trhy / O. Rejnus. Ostrava: Key Publ., 2010. 659 s.
4. Machková H. Mezinárodní obchodní operace / H. Machková, E. Cernohlávková, A. Sato. Praha: Gradapublishing. 2007.
5. ZbynékR. Penezní ekonomie a bankovnictví / R. Zbynek a kol. Praha: Management Press, 2008. 627 s.
6. Kislingerová E. Manazerské finance / E. Kislingerová a kol. Praha: C. H. Beck, 2007. 745 s.
7. Factors Chain International // URL: http://www.fci.nl/home.
Статья поступила в редакцию 6.10.2014
ИНФОРМАЦИЯ ОБ АВТОРАХ
Земан Роберт - Чешская Республика, 37001, Чешские Будейовици; Технико-экономический институт в Чешских Будейовицах; PhD; зав. кафедрой «Экономика и менеджмент»; zeman@mail.vstecb.cz.
Поланецки Лукаш - Чешская Республика, 37001, Чешские Будейовици; Технико-экономический институт в Чешских Будейовицах; PhD; ассистент кафедры «Экономика и менеджмент»; polanecky@mail.vstecb.cz.
