Rating of largest Factors, first six months of 2007
Table 1. Ranking of Russian Factors with regard to amount of transferred financial demands
Table 2. Ranking of Russian Factors with regard to amount of presented financing
Table 3. Ranking of Russian Factors with regard to amount of transferred financial demands, not supported by financing, but other factoring services were provided
Table 4. Ranking of Russian Factors with regard to amount of remuneration
Table 5. Ranking of Russian Factors with regard to amount of international factoring
Table 6. Ranking of Russian Factors with regard to amount of internal* non-recourse factoring
Table 7. Ranking of Russian Factors with regard to amount of serviced companies
Grow and expand
Marina Chernysheva
In the first six months of 2007 the market of factoring amounted to 7.3 bln dollars, and the result will be doubled in the second half of the year. But the leaders have already been expanding their vistas, declaring factoring to be just a part of a more capacious market of commercial finance.
According to studies of the factoring market in the first half of 2007, the amount of demands, actually transferred to Russian Factors, reached about 7.3 bln dollars. It is a bit lower than at the second half of the previous year. In 2006 turnover of the Russian Factors was 11 bln dollars, and presently to show 200% growth and secure turnover of 22 bln dollars in 2007, the market participants should get at least 14.7 bln dollars. This is twice as much compared with the turnover in the first half of the year.
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But the past years’ dynamics tell us that the amount of transferred demands is shared between the two halves of a year approximately 1:2 (see diagram 1). We find the proportion stable, since such a distribution of financial demands, transferred to factors within a year, is a consequence of season fluctuations of wholesale suppliers’ demand. For instance, demand for consumer goods (their suppliers constitute a significant part of the Russian Factors’ clientele) significantly goes up before the New Year holidays. Autumn months are also notable for high purchasing activity.
To justify annual doubling forecasts factors should repeat the result of the previous year in the first half of the current one, and in the rest of the year make up for weak dynamics of the first half of the year by doubling the amount of transferred demands. If such a scenario is implemented this year, the factoring deals’ plan would be implemented.
Small centers of big growth
In the first half of the year sale load is not too high, and factors have time to develop their business with quality. They create new products and promotional programs, work over new technologies, set up relationships with partners including agents and investors, and actively expand their presence in the regions. Their main potential client there is small and medium business: with regard to a number of companies, served by factors, the share of the regions* is higher, comparing with amount of financial demands, transferred to regional companies (see diagram 2). But with growing volumes of supplies from small regional enterprises the share of the factor turnover in the regions would go up, too.
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In the first half of 2007 we already see a reduced large enterprises turnover, down to 40.9% (in 2006 — 44.2%) in favor of SME representatives, accordingly down to 16.1 and 43% (in 2006 — 14.4 è 41.5%).The market structure with regard to a number of factor-served companies in classes of different size remained practically unchanged, which implies growing turnover of factoring-served SME (see diagram 3).
Customized factoring
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In the process of shifting factoring interests to SME area factoring product line is going to be changed. For instance, from the factor standpoint it is not quite expedient to offer a non-recourse factoring to a large reliable company. The vendor’s risk in the majority of cases would be much lower than the purchaser’s risk, and under such circumstances the right to recourse may rescue the factor. But if the client’s business is moderate the right to recourse plays no important role for the factor. This is the best situation to offer factoring to a client protecting him from financial risks.
Increased demand for the product had already been noted by the majority of clients. Amount of non-recourse deals (or with partial recourse) in the first half of 2007 reached almost 0.8 bln dollars, and their share in the overall volume of factor-transferred financial demands went up to 11% (in 2006 — 9.6%). So a non-recourse factoring grows a bit faster than the whole market. "So far the product demand manifests itself only by way of growing interest of clients to the product without serious practical implementation, — comments Yury Volkov, Trust, chairman of the board of directors. — The point is that non-recourse factoring is pretty expensive from the client’s point of view". The amount of non-recourse factoring might be more, but for the Central Bank reserve limitations, due to which many banks have to make special contracts for the right to recourse. "Pretty often we have to introduce formal recourse as an additional collateral — to be able to introduce into a deal a benefit period", — explains Konstantin Ovcharov, Moscow International Bank, head of the factoring department.
Previously there were only two operators providing services of international factoring in Russia - Promsviazbank and NFK bank, but recently they were joined by Trust and Kazansky regional bank. Eurocommerz also serves external operations of their clients, but does it mostly by way of internal factoring, although de-facto it is an international factoring. Total amount of the international factoring within the first half of 2007 exceeded 3 bln rubles, or 1.5% of the transferred demands total amount. Konstantin Ovcharov covers certain aspects through the international factoring: "In a number of foreign countries export and import factoring is as profit beneficial for a factor, as internal one. In our country so far the largest profit comes from internal factoring, that is why it is used by majority of companies and banks. Besides, being a bank branch, we see that letters of credits and guarantees may present competition to the international factoring". But when a factor reaches pretty high level of development with large clientele, it has to offer all the product line, including factoring servicing of external deals of its clients, that is why the near future may see new players at the international factoring markets.
Certain factors have not limited themselves with traditional types of factoring, building their own products for certain market segments on the basis of a standard set of options. Dealing with standard products notably simplifies operations of sales managers and increases the factor "throughput capacity", which is extremely important for companies and banks, actively working with SME. "Almost all the market participants came forward with unique proposals — at least those considering factoring as their main product, — says Yury Volkov, — mostly specialized factoring companies and in a lesser degree banks, because factoring for banks is rather a by-side product". Specialized factors were most active in developing factoring products. For instance, Trust and NFK offered new express-factoring to their clients, and special products were also made for enterprises in certain branches of industry.
Eurocommerz used a subtle marketing approach and packed a technological factoring product into a box. "Boxes permit to make a sort of a factory to attract clients and sell convenient and functional products, — says Ilya Volkov, Eurocommerz, managing director. — We have five box products, four of them are standardized, and one is not, called "Non-standard". Obviously, parameters may change even within the frames of standard products". The box approach has united clarity of a standard product with flexibility of an individual one.
Becoming a component of something bigger
But the factor development is not limited by proposal of different services for transfer of payables. Factoring all over the world is a part of larger industry of commercial finance (non-banking financing), based on a so-called asset-based lending theory (ABL, financing collateralized by different assets). Factoring business development provides for gradual enlargement of assets to be used as collateral for financing — together with rights to claim debts (payables), material stock, commercial contracts, equipment etc. may be used for the purpose, too.
ABL theory is based on special features of risk management, which is totally different from banking risk management. In case of a bank your task is to assess the abilities of a borrower to return money. In a commercial finance-company the point is to assess an ability of a company to manage assets, planned to be used as collateral for financing. Before entering the industry, you have to do a lot to develop technologies to operate new types of assets. The Russian factoring market leader — Eurocommerz — invests significant resources to establish an innovation laboratory, researching and implementing new products, as well as a processing center to serve the company operations.
"In future our business will continue to be based on factoring, — says Grygory Karpovsky, Eurocommerz, president and chairman of the board of directors, — but we start working with other assets, too, like equipment, goods etc. The process will take several years, but to show where we are heading, we have already changed the company name to Eurocommerz Commercial Finance and are beginning to make a product line, offered by commercial finance-companies all over the world".
We expect other players to follow an example of Eurocommerz. But trying to manage a new type of transferred assets new CF-companies will face the same barriers they faced when they entered the factoring market, — first of all, investments to business-processes, IT and risk-management. You can not offer full-scale commercial finance-services without quality risk-management, special distribution network, well-set operation processes etc. New goals call for new standards, and to be in the marker you have to live up to it.
* Regions imply all territories but Moscow and St.-Petersburg, including Central and North-West federal districts.
- 2007, first half year
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