Ahmed Shaheen is the Chief General Manager of Egypt Factors and the Chairman of the Egyptian Credit and Risk Association.
Egypt Factors is the first licensed Egyptian company specialized in factoring services, it was established on 14th November 2006. Egypt Factors is the first licensed Egyptian company specialized in factoring services, it was established on 14th November 2006. The cornerstone of its success is providing a first class accounts receivable management service based on underlying commercial trade transactions, which will strongly support suppliers to meet their buyers’ expectations. Classified as a non-banking financial institution, Egypt Factors is under the supervision and the control of the Egyptian Financial Supervisory Authority (EFSA), which is the primary governmental authority concerned with regulating and facilitating the non banking sectors in Egypt. Egypt Factors is owned by three entities, Commercial International Bank (CIB), Fimbank a public limited company registered under the laws of Malta and the International Finance Corporation (IFC) part of the World Bank Group.
WHAT IS FACTORING?
Factoring is a financial instrument whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate cash with which to finance continued business. In other words, it’s a method of raising short-term funds to increase the cash flow cycle accompanied by an improvement in the liquidity as well as the profitability.
WHAT DOES FACTORING OFFER? (The elements of factoring).
Factoring companies will take care of a debtor’s bookkeeping and monitor and follow-up all outstanding invoices so Bad Debt Protection; and in that sense factoring companies ensure that your invoices will be paid.
In the frame of “Credit Limits” established for each individual buyer, the payment is guaranteed up to the agreed percentage. In case of the financial inability of such buyer to settle, the receivable factoring company will pay instead after an agreed period of time after the due date of the initial invoice. The seller would only have full responsibility for a proper performance as to his part of the underlying supply agreement.
Advances / Funding: Your sales is on open account terms (deferred payment terms) which will turn into cash sales up to the agreed percentage. All receivables will be funded immediately, your cash flow needs will be covered the moment you are shipping and invoicing, should a Bad Debt Protection not be agreed, the seller will have ultimate responsibility for the payment of the receivables.
WHO NEEDS FACTORING?
When cash flows decline drastically, the business will need large amounts of cash from either existing cash balances or from a factor to cover its obligations during this period of time. Companies with poor credit determination, bookkeeping or collection can utilize factoring to save manpower expense or to bring better collection results.
Factoring also includes granting bad debt protection that makes cash flow predictable and it can be tailored to the specific needs of a client and defined to meet the unique requirements of each and every company.
THERE ARE TWO TYPES OF FACTORING
“Non-Recourse” or “Recourse”:
• Non-Recourse: Are receivables that are purchased by the factoring company, with a full balance sheet effecting a change in debt ownership, since the receivables are enforceable.
• Recourse: Is where the ownership of the receivables stays with the seller, with the factor’s right to claims against the client in case of account debtor insolvencies or none payment .
Thus, factoring provides benefits for both suppliers and purchasers.
BENEFITS FOR SUPPLIERS
This increases your sales in meeting the buyer’s needs, cost reduction in the sense of outsourcing heavy administrative burdens as factoring companies manage all outstanding receivables professionally as they are being supported by sophisticated systems, they also check and supervise the creditworthiness of buyers.
Adding to the above, factoring companies help increase and maintain profits and assure forecasted profits materialised and provide bad debt protection measures to help avoid debtor losses.
Planning effective liquidity and cash flow forecasts to turn sales on credit terms into cash sales by which the liquidity flows back at predictable points in time allowing you to settle your payable in order to benefit from early payment discounts. Thus, the selling of receivables cleans up the balance sheets and improves the relevant ratios.
BENEFITS FOR PURCHASERS
It allows purchasers to buy at suitable open account terms thus relaxing pressure on the cash flow cycle to match the time gap between the payable (outgoing funds) and receivables (incoming funds). It also increases the purchase power or purchase volumes without tying up or even without resorting to bank facilities.
Factoring can be distinguished into export factoring “international” and “domestic”
Exporting companies prefer non-recourse factoring, banks cannot grant non=recourse loans and this is reason companies prefer factoring. In addition factoring provides protection and risk management allowing companies to guarantee their money because of the factoring debt management system.
While the domestic market is mainly oriented for SME’s “small and medium sized enterprises” which seem to favor recourse factoring by where the factoring company pays the receipts and the companies transfer their rights to the factoring company and notify the buyers to make the creditor’s status for the factoring companies which guarantees money.
There are factoring companies owned by bank which operate with a large capital and handles major corporations and there are factoring companies owned by individuals or private investors and those operate on a small level with mainly small businesses.
Factoring companies either provide services for the existing customers of the bank that owns the factoring company or approach the market in general, but in every segment, factoring companies are very selective regarding the product it produces.
Factoring company completes the bank work, customers can only resort to the bank when their balance sheets are strong but if the balance sheet is weak then bank will not provide any finance to that company and this is where the factoring company completes the finance work. Plus factoring companies provide factoring services tailored to the requesting company and not force a service on the company.
SME’s now resort to factoring as a source of finance as it presents the most suited option for them because of the strength of their balance sheets and at the end of the day companies choose what suites them. If they need to cover the risks from the buyer then they will need the risk protection factoring provides but if they only need finance then they can choose between factoring and bank loans, factoring is flexible and helps companies grow.
Factoring is relatively new to the Egyptian market and Egypt Factors hasn’t had any problems or issues as we function under EFSA (Egyptian Financial Supervisory Authority) which takes all measures to ensure a stable and smooth operations by updating the regulations and laws that Egypt Factors operate through and EFSA is currently working on a new law encompassing all regulations for factoring.