Meet the Experts: International Factoring and Open Account Trade
Companies engaged in international trade, regardless of their size and industry; often face a demand from the importers for longer payment terms. This means, getting the payment weeks after the invoice date. However, these practices put exporters/importers into an unfavourable position, where the business growth is dampened. And, this is where International Factoring comes in.
Guidelines to International Factoring
Companies engaged in international trade, regardless of their size and industry; often face a demand from the importers for longer payment terms. This means, getting the payment weeks after the invoice date. However, these practices put exporters/importers into an unfavourable position, where the business growth is dampened. This is where International Factoring comes in. It basically acts as export insurance. The exporter hires the factor, who in turn guarantees the import price of the goods to the exporter. Simply, we can say that factor is responsible for the cash flow from the importer to the exporter.
Now that more than 85% of global trade is transacted on open account terms, the need has never been greater for suppliers (large and small) to assess whether or not to accept a purchase order by virtue of the buyer’s ability to pay and track record. Essentially, suppliers have become providers of working capital to their customers and the ability to finance that extension of credit is as crucial as mitigating the credit and political risks of default.
In this interview series, we heard from 2 International Factoring experts and learned about the developments and the best of practices in the sector. TFG’s Persiana Ignatova spoke to Tony Brown and António Salgueiro, who are members of World of Open Account (WOA).
Persiana: Thank you so much for doing this with us! To start off, please tell us about your involvement with the WOA community?
Tony: I have the pleasure of serving as a Community Expert on the International Open Account Trade Finance and Supply Chain Finance Learning Labs, and have participated in webinars that address current issues of concern to lenders, importers/exporters, professional advisers and investors. In addition, I have curated and am moderating a panel at WOA’s annual convention in Antwerp on the convergence between trade, finance, logistics and data science.
Antonio: I know Erik Timmermans for a long time while representing two different members of the former IFG. When he launched the WOA project, he invited me to join as an expert advisor and later on to play a facilitator role in the International Open Account Finance Learning Lab. I was very pleased to accept such an invitation, and now that we are celebrating the first year since the project was launched, I would say it has been much successful
International Factoring Trends in 2019
Persiana: Can you tell us more about your experience in international factoring? What are the current trends in this activity?
Tony: My involvement in cross-border factoring started as a client of Barclays Factoring back in the late 80’s when I left the fourth-largest US Bank to start the first Purchase Order Finance company in the U.S. My company, Trading Alliance Corporation, specialized in helping successful companies grow by recognizing their customers’ purchase orders as collateral. We financed our clients’ purchase of goods from suppliers to fulfil those orders and factored the resulting receivables. In that way, we relied on factors to vet the credit risk of buyers while providing early funding to us against our clients’ receivables. The factors relied on us to provide inventory finance for their clients when they couldn’t or didn’t want to and, at the same time, we offered a unique degree of transactional performance due diligence to ensure that goods were compliant with buyer orders and were shipped on time. We acted like a lender but thought like a trader, sometimes taking ownership of the goods we financed.
Subsequently, I managed the $1billion factoring business for GMAC, the second largest US factoring business and started the international factoring business for First Capital (subsequently sold to Sterling Bank).
Large banks like Wells Fargo and Macquarie and smaller finance boutiques have retained me to develop new markets, products and strategies for the international factoring business. I’ve also helped importers and exporters find the best fit for their international invoice finance needs.
Antonio: My positions always included international business, and I worked both with the IFG and FCI, being an active supporter of the union of the two in 2016. Also, I made my entire career in international groups and networks, including on coordination roles such as group project director and global head of factoring. Besides traditional two-factor business, I went far beyond the conventional local reach of standard operations, and I had the privilege of structuring many transactions worldwide, assembling resources from different providers and having in mind each market specifics. That was one of the experiences I enjoyed the most, and curiously, also something I consider a much relevant business trend: the emergence of global operators. These, together with the long reach offered by market platforms, with new products and new business models, have been definitively a significant trend over the last years, connecting all type of investors with corporate demand for working capital solutions, in both ends of the supply chain.
Factoring and its Relation with the Macroeconomic Environment
Persiana: How has the market changed in the recent macroeconomic climate?
Tony: Now that more than 85% of global trade is transacted on open account terms, the need has never been greater for suppliers (large and small) to assess whether or not to accept a purchase order by virtue of the buyer’s ability to pay and track record. Essentially, suppliers have become providers of working capital to their customers and the ability to finance that extension of credit is as crucial as mitigating the credit and political risks of default.
The current macroeconomic environment poses both challenges and opportunities for international factoring.
The challenges include:
- A retrenchment by banks and traditional from cross-border lending due to risk aversion and regulatory pressure
- Slow acceptance of Artificial Intelligence (AI)/data science to augment risk management and customer service
- The lack of uniform international legal and regulatory standards relating to receivables finance and the ability to accept receivables as collateral
- As a result of the preceding challenges, the cash conversion crunch faced by small exporters. They are challenged to obtaining finance and risk mitigation to extend the payment terms that their large buyers demand while simultaneously overcoming the reticence of their suppliers to extend them deferred payment terms to boost cash flow
- Of course, free and fair trade is the friend of growth in international factoring. The current uncertain environment with regard to tariff disputes has caused a drag in world trade as supply chains adjust to protective/distortive trade policies. The sooner this ends, the faster open account trade will expand
But opportunities exist:
- Credit insurers have developed innovative partnerships with lenders/trade platforms (e.g. LiquidX-Marsh e-marketplace for credit insurance)
- Non-bank pools of funding are increasingly aware of trade and receivables finance as a lucrative, risk-adjusted, non-market risk correlated source of investment opportunity
- An increasing number of global jurisdictions have adopted electronic filing of collateral liens, thus boosting the acceptance receivables finance for small companies
- The number of international factoring companies and annual global factoring volume continue to increase – especially in developing markets where a $1.5 trillion trade finance gap exists for small exporters.
Antonio: Factoring always shows very resiliently, independently of the economic climate, with steady growths, often in a counter cycle, like currently in Europe, with factoring growth far outperforming the anaemic leading economies. Notwithstanding, the market changed a lot, fueled by technology and the prevalence of negative interest rates and excess liquidity, regulation, deregulation, open banking and digitisation, with many newcomers, from all sort of fintechs to market platforms and global operators, along with the traditional players, all contributing for a much broader range of offers and business models.
Technology makes Factoring Superior Financing Option
Persiana: Does technology offer viable solutions to help the market?
Tony: Increasingly yes.
- The increasing importance of digital vs paper-based trade offers receivables/payables lenders the ability to deliver timely, simple solutions to sellers and buyers of goods in electronic commerce
- In partnership with data scientists, receivables lenders can mine historical trading performance to provide algorithmic receivables and inventory finance solutions to enhance competitiveness
- Trifecta bets on blockchain-based solutions, the Internet of Things (IOT) and Smart Contracts will yield transformative wins within 5 years. These will boost trade profitability by reducing risk and inefficiency while nurturing the development of innovation international factoring funding and risk models.
Antonio: Despite the experimental nature of some developments, it is unquestionable that technology has been the main driver for transformation in the industry, by providing the tools and high-performance systems, potentiating efficiency and disruption on essential processes, sustaining the development of new products and new business models. More than buzzwords, blockchain, AI and digitisation are making its way at the forefront of this process, allowing an exponential increase in performance in parallel with the emergence of new global reach operators and market platforms, and flourishing all kinds of supply chain finance offers.
The challenges related to International Factoring
Persiana: What are the challenges that the businesses face when it comes to international factoring?
Tony: One of the main obstacles is the market reputation of Factoring as a mainstream receivables finance solution. It’s still perceived as a “cash-in-a-flash”, expensive solution for financially challenged companies.
Another challenge is that international receivables lenders tend to pigeon-hole themselves into a narrow, myopic product offering and fail to adopt an end-to-end supply chain finance solution that incorporates inventory funding – both goods in production and finished goods. Often, the risk in providing receivables finance can be better managed through a wider prism.
Businesses should look beyond the “price” associated with factoring and focus more on the “value”. To this extent, when choosing an international receivables lender, a business should pay attention to its global reach, its embrace of technology, prowess in risk mitigation, innovation in funding options, alliances with other supply chain service providers (like logistics companies) and market reputation.
Antonio: For industry stakeholders, it is the regulatory framework, which always becomes more difficult in cross border business, because of the lack of a common referential for business, and because of the many differences from country to country. In fact, out of the legal frameworks provided by the FCI (GRIF & FCI Reverse) and IFG (Model Law for Factoring) and despite the efforts of several international organisations (UNIDROIT, UNCITRAL, IFG, FCI) there’s still a long way to go. Notwithstanding, international volumes growth keeps outperforming domestic ones, both with outstanding growth rates over the years, which prooves the operators’ ability to overcome the issue.
Regarding corporate clients, there were never so many offers and solutions for cross border transactions as at present. After the union of the IFG/IFC, from 2016, there is more extensive international network coverage for traditional business. Furthermore, the emergence of global market platforms and global reach factoring operators spread a variety of new offers and products worldwide. However, there’s still a shortage of credit insurance and factoring services providers in many developing countries, and also a lack of appetite for MSME’s.
Persiana: What is the most interesting part of your role within international factoring?
Tony: Clients/employers that refuse to accept the status quo. Those that think creatively and are driven by the quest for innovation and added value. Many of my most satisfying assignments/jobs have been to create new trade finance solutions by bundling other supply chain services across extended geographies. I love dealing with people of diverse cultures and businesses and solving problems. Being a foodie with an appetite for global cuisine and wine is no occupational hazard in my business!
Antonio: I love to structure new products and offers, putting together best practices and my experience, to fit the needs of each client. Nowadays, technological developments significantly expanded the options and solutions available to companies of any size, taking business possibilities to new boundaries, in terms of offers and global reach. In my current role, as advisor and facilitator, this means to find the best solutions and making things happen for my clients.
Persiana: Can you share any stories or examples of how your company is making a difference to others, or how you’re making an influence in your sector?
Tony: Yes, I have been at the forefront of developing groundbreaking solutions that combine inventory, receivables finance and risk mitigation. The first example (mentioned above) was my pioneering work in creating purchase order finance. I parlayed that into a bundling of trade and logistics services at Maersk and other businesses. I’m also focused on providing off-balance sheet inventory finance by taking ownership of it. That means buying goods for cash from a supplier, holding the inventory and delivering the goods to the buyer where, how and when they need them. This is the ultimate end-to-end value-added service and leverages my 30-year experience as a trader, lender, logistician, credit insurer and innovator.
Antonio: I started in the factoring business in 1990 and made my career within recognised industry reference companies, in a multiplicity of experiences and roles, much marked by international and multicultural environments. Also, some of my positions allowed me to learn far beyond the geographical implantation of my companies and groups, getting familiar with a diversity of practices and markets and structuring products and operations across Europe and worldwide. Likewise, Four Capital Points is a global reach company, set to share this capital with any industry stakeholder, combining business best practices and trophies of experience in the sourcing, structuring, set up and optimisation of working capital solutions and operations.