Factoring keeps cash flow steady
Niche credit service pays invoices in advance of payment received
 | | Factoring firms such as O.B. Heller manage all elements of a company's invoicing. |
By Katya Zapletnyuk
Staff Writer, The Prague Post
March 10, 2005
When a crisis in the metal industry in 2002 and 2003 drove Kovohute Celakovice, a producer of brass, copper and bronze goods, into the red, it could find no bank to come to the company's rescue. It was in desperate need of operational capital to keep afloat, so it turned to a factoring firm.
"We needed to pay our creditors. We needed money," said Renata Urbanova, Kovohute's deputy production and economic director. Today, 15 months later, the firm is operating in the black again, and it is still a client of the factoring company, which assures that it has cash for goods delivered without having to wait for the usual 90-day turnaround.
The cost of money
Factoring is a modern financial service that finances a company's invoices until they are paid by its clients. A factoring company manages all elements of the billing process, including notification of unpaid invoices and, in some cases, taking over risks connected with bad claims and client insolvency. Once a company has delivered its goods or services to the client and sends out an invoice, the factoring company will provide up to 85 percent of the invoiced sum, which is available on an overdraft bank account. The company gets the remaining sum after its customer pays the invoice in full.
Clients pay a lump-sum fee for the service. The amount depends on the amount of turnover of its transactions with he factoring company.
"Our standard client had about 100 million Kc [$4.4 million] worth of transactions with our company last year," said Pavel Schweiner, the commercial director of one of the largest factoring firms on the market, O.B. Heller, which was founded in 1992. "A lump-sum fee amounts to up to 0.05 percent of the sum." In addition, a company pays interest rates from the overdraft advance payments it draws from the factoring company.
Schweiner said that his company's clients are mostly medium-sized trade and production companies with annual sales from 50 million Kc to 300 million Kc.
"Factoring is profitable for us, although we are aware that this is rather expensive money," said Karel Rem, the general director and majority owner of MSA Dolni Benesov, which produces industrial fixtures for the energy industry and exports over 90 percent of its products. "It is a question of making good financial sense of it in the company and compensating for the high price."
Rem said that factoring companies fill the gap that exists in this country's financial spectrum. "They provide financing where banks find it too risky to interfere," he said.
Growing market
Factoring companies are not new to the Czech market, having been active since the early '90s. However, experts say that use of this service has not yet reached its full potential. The joint annual turnover of factoring companies amounts to 80 billion Kc and accounts for about 2.5 percent of gross domestic product (GDP), according to the Association of Factoring Companies. In countries such as the Netherlands, France and Great Britain, the number reaches as high as 5 percent of GDP. At the same time in Austria the service only accounts for 1.2 percent of GDP, and in Slovakia it is only about 1 percent. The factoring business has been growing up to 30 percent a year since 1999, said Jiri Matula, the chairman of the Association of Factoring Companies.
Matula said that the factoring market will keep growing. "Our main competition are banks providing loans against made-out invoices," he said, adding that in Western Europe banks don't provide such loans and companies use factoring instead.
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