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Summary of RFIx 2011: Factoring in the new normal.

07.04.2011

Understanding your environment is, of course, essential for doing business. The environment that factors work in has always been fairly dynamic – the crisis, however, has taken this to new levels. The BCR Receivables Finance International Conference, which took place last week, focussed on understanding the opportunities within this post crisis environment – the opportunities of the new normal.

The ‘new normal,’ a phrase coined by William Gross, the founder of the global investment management firm Pimco, describes the post crisis environment of slow growth, unemployment and inflation. Yet for the factoring industry, the new normal could easily stand for high growth, new markets and record profits and could signal the beginning of a great time for the factoring industry.

For factors, the new normal may be quite a different environment to that of traditional bank lenders. Growth out of recession will put new demands on recession-weakened balance sheets, as companies try to restock to meet new orders. Larger corporates are increasingly interested in invoice finance structures as cash-flow becomes a central focus of many treasury operations. According to a recent report by the Hacket group, freeing up unnecessary working capital is the cheapest form of financing – all in all there is now a much bigger focus on working capital and cash flow.

The business world is beginning to see the strength of the receivable. And it’s not just SMEs; it’s also large corporates, sometimes very large.  The crisis has projected the receivable into the spotlight more than ever before. Banks, financial institutions and corporates of all sizes are beginning to understand that the receivable is an asset that can be counted on much more than other assets. Its short-term, self liquidating nature means that much of the, uncertainty of advancing against other assets are absent.  

This means that there are vast opportunities looming on the horizon for receivables financiers – only around five per cent of trade receivables are currently financed in Europe; but according to Igor Zax, the author of a report by the London Business School, the potential could be five times that figure. Factors, with their in-depth knowledge of receivables, are in a unique position to take advantage of these new opportunities. 

But where will the industry see this growth? Events of the crisis are accelerating and driving a growing trend towards greater efficiency in the utilisation of excess working capital.  There are three ways in which we will see this happening. Firstly, the increasing use of traditional methods of factoring; secondly, growth in supply chain finance and Thirdly, the increasing use of Receivables Exchange type operations. What will oil the wheels of this process even further is the move towards document standardisation and document digitisation through the harnessing of technology to create fast information flows; and also the greater utilisation of credit insurance to make receivables funding propositions more attractive.  

This all points towards a significant and, arguably, inevitable commoditisation of receivables. This might not be what everyone wants to hear, and it may not happen this year, it may not happen next year, but it will happen.  These are the processes of the new normal. The new normal, created in the fallout of the crises that has changed the way the business of commercial finance is being done.  But commoditisation will not be comprehensive; there will still be a need for traditional factoring - it will be very hard to beat the strength of advancing against a ledger with a wide spread of relatively high risk debtors.

The really big question is what are factors going to do about getting some of this new business?  Jack welsh, a previous CEO of General Electric, once said “control your own destiny or someone else will.” There is a lot of truth in that statement for this industry, because if the factors don’t get this new business as it emerges, someone else will – interest is growing fast. 

Factors should be able to exploit this growth as they have a head start; they understand the receivable better than anyone else. 

I believe that this is the challenge for today’s forward thinking factors – how to exploit the changes that are happening, how to take advantage of the huge increase in receivables financing that the business world is heading towards. That means learning about the new methods of freeing up cash tied up in working capital, targeting new market sectors and harnessing existing technologies in new ways. 

Over the course of the conference, we heard from industry experts who have already begun to think about the new normal. We heard about opportunities in new markets, how factors can use their receivables knowledge to get involved in new securitisation deals, why leaders need fresh vision; how social networking is making huge inroads into business marketing strategies; where and why new markets are opening up; why receivables finance is firmly on the radar of large and very large corporates.

This is all part of the new normal and for factors to profit from it they must understand it. What is required is some different thinking, some thinking which is beyond that of traditional factoring; what is needed is some ‘new normal’ thinking. 

Source: Factorscan


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