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Factoring and customers’ needsEvidence from a new survey in the Italian market

IFG GM Club 2009 – Milan, February 5th ’09

Massimo FERRARIS, General Manager Ifitalia and VP Assifact

James MUGERWA, CEO GE Capital Finance Spa and Board Member Assifact

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Agenda

The survey on factoring demand by SDA Bocconi Business School

The use of commercial credit

How enterprises see factoring

The use of factoring

The level of satisfaction in the factoring relationship

Factoring and business management

The debtors’ point of view

Factoring and Basel 2

Factoring and IAS

Conclusions and perspectives

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Factoring is a tool well known and widely used in economic and financial systems.

Factoring market has been growing all over the world steadily and significantly for

many years. Italy is one of the most important factoring markets in the world. Despite the world-wide relevance of factoring, there are only a few studies regarding

the characteristics of factoring demand. In 1996, the Italian Factoring Association (Assifact) conducted an important survey on

the characteristics of factoring demand (AF 1996). In particular, the survey focused

on: the perception and evaluation of the product characteristics, the relationship with

the banks and the factoring companies, the effects of factoring use on the enterprise

management and finance. After twelve years, the Research Department “Claudio Demattè” of SDA Bocconi

Business School, on behalf of Assifact, has returned to this topic (SDA 2008), with

the aim to better define the most relevant profiles of factoring use by Italian

enterprises.

The survey on factoring demand by SDA Bocconi

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The survey on factoring demand by SDA Boconi

Survey questions:

What do Italian enterprises think of factoring ?

How do Italian enterprises use factoring and how do they

evaluate its convenience ?

What are the reasons of satisfaction or dissatisfaction in

a factoring relationship ?

What are factoring perspectives with regard to the new

IAS/IFRS and Basel 2 scenarios ?

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The survey on factoring demand by SDA Bocconi

The sample

The sample was composed of 100 enterprises with different features. The sample can be considered to be representative of the actual and potential customer base of the factoring market.

MANUFACTURING

37%

BUILDING7%

PRIVATENON FINANC.

49%

CENTRALBODIES/ENTITIES

2%

LOCAL BODIES/ENTITIES

3%STATE/GOVERNEMENT

BODIES/ENTITIES2%

Sample by industry sectorThe main features of the sample were: enterprises’ date of establishment in a wide

range (from 1831 to 2007); on the average, enterprises ‘older’ than the

ones of 1996 survey; 43% of enterprises with less than 100

employees; 88% of enterprises with mainly domestic

turnover (min. € 200.000, max. € 30

billions); 35% of enterprises with seasonal turnover.

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The use of commercial credit

Commercial credit mainly represents a way to fund the customer and a strategy of sales expansion; it also contributes to match incoming and outgoing flows.

a guarantee of the product’s

quality

7%a strategy of

Sales expansion 19%

a way to matchincoming/outgoing flows

19%

a tool to assessreliability of the

counterpart

10%

a tool to establish a lasting

relationship with the counterpart

15%

a way to fund the customer

25%

other5%

No opinion2%

What does business credit represent?

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Main issues: payment delays; high costs in credit management.

0%

5%

10%

15%

20%

25%

30%

35%

40%

Customers’ insolvency

18%

39%

22%

17%

4%

What are the main issues in the use of business credit?

High payment delays from customers

High costs in credit management

Difficulty to assess the counterpart

Other

The use of commercial credit

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How enterprises see factoring

A comparison with the results of the 1996 survey clearly shows a greater awareness of the service components of factoring (risk protection and credit management facilities).

What does factoring represent? Survey SDA 2008

A source of funding complementary to bank loan 26%

A guarantee against debtor’s insolvency 25%

A tool for professional credit management 19%

A source of funding, alternative to bank loan 16%

A way to recover bad debts 7%

Other 6%

No opinion 1%

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0%

5%

10%

15%

20%

25%

30%

35%

1 2 3 4 5 6 7

What does factoring represent?(by turnover ranges)

< 25 Mln

25 - 250 Mln

over 250 Mln

1. a source of funding alternative to bank loan2. a source of funding complementary to bank loan3. a guarantee against debtor’s insolvency4. a tool for professional credit management5. a way to recover bad debts6. other7. no opinion

The higher the users’ turnover, the

less factoring is perceived as a mere

source of funding and the stronger is the perception of factoring service components (risk

protection and credit management

facilities)

2008 survey confirms the

results of 1996 survey

Answers by turnover ranges (< 25 – over 250 Mln Euro)

How enterprises see factoring

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The use of factoringThe sample enterprises have been using factoring as follows: almost 50% has been using (or used) factoring for over 5 years; 32% has been using (or used) factoring for less than 3 years.

For large enterprises factoringIs a valuable business tool: 50% has been using (or used)it for over 10 years.

Factoring relationships tend to be of longer duration also for enterprises which:• regularly use factoring;• significantly use commercial

credit.

32%

14%

23%26%

5%

37%

26% 27%

9%

1%0%

5%

10%

15%

20%

25%

30%

35%

40%

1 2 3 4 5

If you are (or were) a factoring customer, how long have you been using factoring?

SDA 2008

AF 1996

1. 1-3 years2. 3-5 years3. 5-10 years4. More than 10 years5. Since the company was born

A comparison with the results of the 1996 survey shows an evolution in the duration of the

factoring relationships: factoring tends to be used for longer periods of time and more regularly.

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The use of factoringAmong the sample enterprises:

45% have a business relationship with only 1 factoring company;

41% have a business relationship with more than 1 factoring companies ( from 2 to 4);

14%, mostly large enterprises, have a business relationship with more than 4 factoring companies;

71% of the experienced customers have business relationships with more than 1 factoring

companies;

the less experienced customers (57%) prefer to have only one factoring relationship.

How enterprises get acquainted with factoring

40% through direct contacts with a factoring company;

27% through banks (in particular small enterprises);

A comparison with the results of the 1996 survey shows a lower relevance of banks as promotion

vehicles for factoring.

7% gained knowledge of factoring through enterprises which already used it;

26% (in particular large enterprises) gained knowledge of factoring through other sources, mainly

direct knowledge or previous experience.

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The use of factoring

The reasons for using factoring

Customers which

occasionally use

factoring tend to

consider more

important credit

risk coverage

(30%).9%

21%

36%

6%

17%

10%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Reduction of bank loan

Increased growth of the business

Cash

Recover unsettled invoices/bad debts

A guarantee against debtors’ insolvency

Outsource the credit management

Your company adopted factoring, because…

The use of factoring is mainly due to liquidity requirements (36%), strong growth of the business (21%) and necessity to cover the risk of debtors’ insolvency (17%).

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The level of satisfaction in the factoring relationship

The level of satisfaction in the factoring relationship is considered: good by 62% of surveyed companies excellent by the 15% sufficient by the 20% poor only by the 3% of companies, but this % is higher among former customers

(14%).

4%

39%

50%

7%0%

9%

72%

19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

poor sufficient good excellent

Level of satisfaction in the factoring relationship

Occasional users Systematic users

Occasional

factoring users

are less satisfied

than those who

use factoring

systematically.

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Main reasons forsatisfaction

Main reasons for dissatisfaction

Main reasons for abandoning factoring (former customers)

Speed and certainty of funding times

Cost Lacking/Dissatisfying insurance services against debtors’ insolvency

Guarantee against debtor’s insolvency

Only some customers may be assigned

Cost

Factor’s experience in credit management

Unefficient management services

No significant reduction of internal costs of credit management

Possibility to assign the entire customers’ portfolio

Internal costs of credit management do not decrease significantly

Low amount of funding (%)

Automatic financing of the sales growth

Debtors do not like to pay

via the factoring company

The level of satisfaction in the factoring relationship

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Those who rate factoring being more expensive than bank loan consider that it is a more complex and complete service (about 41%).

Only a minority think that factoring mainly serves companies that face financial weakness (5%). Although, opinions significantly differ among business categories.

Why does factoring cost more than bank loan?

CustomersFormer

CustomersNon

users

Factoring is a more complex and complete service than bank loan

45% 29% 35%

Factoring companies usually serve customers facing financial weakness/troubles

3% 14% 9%

The level of satisfaction in the factoring relationship

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The level of satisfaction in the factoring relationship

Most of surveyed companies consider that the cost of factoring has

to be compared with the average cost of financing and the

internal cost of credit management (53%) or, but less frequently,

with the cost of bank loan (33%).

From the 1996 AF survey to the 2008 SDA survey, the perception of factoring evolved into

“an integrated system of financing and services”.

In the same way, also the costs evaluation has evolved: internal credit management is taken more

into account when assessing costs.

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The level of satisfaction in the factoring relationship

The cost of factoring should be compared with:

Expert Users

Less expert Users

Occasional Users

Systematic Users

The cost of bank loan 26% 43% 57% 23%

The cost of supplier credit 9% 7% 4% 9%

The average cost of financing and the internal cost of credit management 56% 43% 28% 63%

Other 9% 7% 11% 5%

More expert and systematic users are more likely to evaluate factoring costs in comparison with the internal costs of credit management.

58% of users dissatisfied from factoring cost are more likely to compare it with bank loan cost.

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Factoring and business management

From a financial standpoint factoring mainly enables users to optimize

the collection planning and, less frequently, to solve temporary or

chronic financing needs.

Solve chronic financing needs

19%

Solve temporaryfinancing needs

18%Optimize collection planning

48%

Increase turnover growth

8%

Other7%

From a financial standpoint, factoring enables your company to:

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Factoring and business management

From a financial standpoint, factoring enables your company to:

SmallEnterprises

MediumEnterprises

LargeEnterprises

Solve chronic financing needs 31% 15% 12%

Solve temporary financing needs 26% 18% 6%

Optimize collection planning 39% 43% 70%

Increase growth of turnover 4% 9% 12%

Other 0% 15% 0%

The larger is the enterprise, the more frequently factoring is considered as a tool to optimize cash flows planning.

The same is for more expert and more satisfied users.

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Factoring and business management

Factoring customers use advanced funds: mainly to refund their dues less frequently to finance sales growth (mainly among expert users and

medium enterprises) rarely to be invested.

82% of surveyed companies with a well developed use of commercial credit,

if compared with competitors, use advanced funds to refund their dues.

Compared with the past, the % of companies investing in sales growth has decreased (19% in ’08

vs 36% in ’06) the % of companies using finance to refund their dues to suppliers or

banks has increased

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The customers’ (debtors) point of view

Surveyed companies believe that: their suppliers use factoring mainly because they need cash (50%) assigned customers (debtors) consider turnover assignement like something usual

in the business management (38%) or like a disturbing event in the relationship

with the supplier (31%).

something usual in business management

38%

31%

15%

11%

other5%

Debtors consider turnover assignment to a factor/bank like: Lower % of those believing that debtors

see turnover assignement like:

an evidence of supplier’s financial

weakness (15%)

an evidence that the supplier is taking care of credit management

and cash-flows planning (11%)

A disturbing event in the relationship with supplier

Evidence of financial weakness of the supplier

Evidence that the supplier takes care of

credit management and cash-flow planning

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Factoring and Basel II

32% of surveyed companies believe that their standing towards financial partners and lenders will be strenghtened (mainly for small enterprises); 47% believe it will remain unchanged.

Companies expect to increase their equity (25%), to enrich the company information available for their lenders (23%) and to focus on selection of their customers.

Almost half of them believe that, in the Basel 2 perspective, factoring companies assess customers differently from banks (63% of large enteprises).

58% believe that factoring may improve the company standing towards lenders because it reduces debts, it improves the financial structure and treasury and it helps the business growth by boosting the working capital.

This may result in an increased use of factoring by enterprises (20%).

67% of factoring systematic users (vs 46% of occasional users) believe that using factoring may improve their standing towards lenders, mainly because of its positive effects on working capital and business growth.

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Factoring and IAS

Only 1/3 of companies have a IAS compliant balance-sheet. Among them only a few perceive a different behaviour of lenders (24%) in terms of quantity, costs, timeframes, guarantees.

For 57% of surveyed companies, IAS have added complexity to accounting and fiscal processing, but have improved the way to express the business value (69% have registered positive effects of new accounting standards on balance-sheet).

63% of IAS compliant companies interviewed identify the factoring benefits related to the derecognition off balance-sheet: it improves balance-sheet ratios and financial standing.

70% of large IAS compliant enterprises believe they get benefits from the derecognition, while smaller enterprises have a lower perception of it (50%).

71% of commercial credit users believe they can get benefits with lenders thanks to the credit derecognition off balance-sheet.

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For 66% of surveyed companies, the use of factoring is expected to grow further (vs a less optimistic 46% of companies surveyed in 1996).

Factoring systematic users (84%), satisfied users (90%) and commercial credit users (84%) are more inclined to forecast a further development of factoring.

97% of current users intend to continue the factoring relationship in the future.

More than 1/4 of non users intend to start a factoring relationship in the future, mainly as guarantee against debtors’ insolvency.

More experienced and non occasional users clearly understand factoring benefits and peculiarities and show to use it “correctly” as a tool.

Some prejudices and clichés on factoring still exist instead, mainly among less experienced users, who use factoring rarely (and badly). On-going information and education are needed to help enterprises to fully understand the multiple capabilities and benefits of the factoring tool.

Surveyed companies, nevertheless, are aware that factoring is a financing tool to support working capital. More frequently companies appreciate factoring as a credit management tool.

Conclusions and perspectives

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Thank you for your attention.

Massimo FERRARIS

General Manager, IFITALIA

Vice President Assifact

James MUGERWA

CEO, GE Capital Finance Spa

Board Member Assifact