Business of recession a boon for factoring companies

“I think we will see a period of continuing growth."
By : Greg Goodale

    Keeping the customer satisfied: Car manufacturers use Forin’s factoring services.

   Economic uncertainties are giving a boost to the growing number of factoring firms recently set up in Poland. But a shortage of trained staff, and the lack of a legal framework, are still holding back what could be a burgeoning industry, analysts said.

   “I think we will see a period of continuing growth,” said Dawid Naglik, financial services manager at Bertelsmann Service Center Poland, part of German media giant Bertelsmann. Naglik said the market is ready for the launch of more specialized factoring firms offering a wider range of services.

   Factoring firms typically undertake to collect debts owed to a company, while advancing the company a portion of the money it is due to receive, which can be used as working capital. These firms assume all or part of the risk for customers who delay or refuse payment. They can also offer their clients credit using their receivables as security.

   Mirosław Nowicki, chairman of Forin, part of the BIG Bank Gdański group, said liquidity problems facing companies during a recession make banks more prudent in their lending, refusing loans to companies that may otherwise have good prospects. This often results in companies turning to alternative sources of finance, such as factoring firms. Large companies with several debtors particularly look to factoring firms during tougher economic conditions, because of greater legal costs incurred by chasing outstanding payments from clients. “While a worsening economic climate is not good for banks, it is very good for factoring,” Nowicki said.

   The driving force behind the creation of additional factoring firms in Poland is the effect of central bank guidelines that increase the workload of banks providing factoring services. Since 1997, the National Bank of Poland (NBP) introduced stricter rules for banks operating on the receivables market, requiring them to assess not only the firms they provide factoring service for, but also their receivers. According to Nowicki, this greatly increases the amount of auditing that banks must carry out for each factoring contract. “My current clients have more than 4,000 receivers,” Nowicki said. “Assessing them would clog a bank’s risk-assessment (department) for months.”

   Since no such requirements are made of factoring firms, banks have been splitting off their factoring operations and forming independent companies. “The policies of the NBP are aimed at making banks stick to activities strictly within the confines of banking,” Nowicki said. “This is why banks are also separating off their stock brokerages.” He added that by making banks separate off their factoring services, the NBP has reduced the field it has to monitor since the resulting companies fall under the jurisdiction of other monitoring bodies.

   As well as reducing their auditing workload, banks favor separate factoring firms as this form of financing does not require them to create additional NBP reserves to back contracts, or to tarnish their image by getting involved in messy legal proceedings to regain their assets from unreliable debtors.

   The value of Poland’s factoring market has grown substantially in the past six years, according to research by Factors Chain International, an organization of banks and factoring firms based in Holland. In 1995, total factoring volume amounted to just O 11 million and grew rapidly between 1999 and 2000, from O 605 million to O 2.08 billion. This puts the Polish factoring market on par with Austria’s, which saw O 2.2 billion in factoring turnover last year. But Poland is a long way behind the U.K., the world’s largest factoring market with sales of more than O 123.7 billion in 2000. The organization also said the Polish market is divided between only six companies, compared to 13 in Hungary, which had a total factoring volume of just O 344 million last year.

   Naglik said Poland’s lack of a legal framework to support factoring is principally responsible for the small number of independent firms to open here. “There is no such thing as a factoring contract in the commercial code,” Naglik said. “For a long time there have been problems with resolving the (legal) question of receivables, and selling a service that is surrounded by doubt has made it difficult.” The problem for banks has been a lack of trained personnel. “This was caused by the very specialized nature of this field,” Nowicki said. “In 1997, there may have been only 10 people who knew factoring well. There was a shortage of people, and there still is.”

   Naglik expects the growth of factoring in Poland could result in many new companies competing for control of niche markets. “The market will be divided between a handful of dominant firms that are already becoming evident,” Naglisk said. “There will be between 10 and 20 medium-sized companies, while the rest will concentrate on specific sectors of industry.”