Factoring: payment trends and credit risk factors

Hungarian enterprises have become more disciplined in paying invoices and collecting receivables, and they are also more careful when it comes to selecting business partners. In general we can say that the payment morale has improved.

The practice of delayed payment is much less widespread than it was in 2013 – Balázs Vanek, country manager of Atradius Credit Insurance told Trade magazin. Decision support services expert the Bisnode Group reported that in the first half of 2014 companies paid 67 percent of invoices on time – in the first half of 2013 this ratio was 59 percent. Country manager József Keleti also informed our magazine that in the first six months of the year the average payment period was 27 days, while one year earlier this duration was still 29 days. According to Péter Felfalusi, managing director of Intrum Justitia Kft. companies issued fewer transfer invoices as cash payment became more frequent. This isn’t simply a form of risk management but also a way of avoiding increased banking costs. Since July 2013 the Civil Code regulates payment deadlines more strictly. One of the most important changes is that the payment deadline can be 30-60 days at the maximum. Those who pay later can be obliged to pay at lest 40 euros as a compensation for the cost of collecting the receivables. Those working in the sector appreciate the changes in regulation but their experience is that they brought no results, perhaps due to the lack of efficient sanctions. At the same time major companies have started to use increasingly longer payment deadlines with their suppliers. Zsombor Baltay, the CEO of GF Faktor Zrt. reckons very few of these suppliers dare to ask for the 40-euro cost compensation because this solution doesn’t really support good partnership relations. There is no exact data on the value of invoices paid late or not paid at all, but estimation is that the sum may be a thousand billion or even more at national economy level. These days 63.2 percent of Hungarian enterprises use one or more types of credit management tools in order to alleviate the risks arising from non-payment by B2B partners. This ratio is the highest among the Eastern European countries examined. Valentin Póka, head of sales at Coface told us that many companies use information gathering and monitoring services, but relatively few work with proactive information products (complete with negative payment history) or take out an insurance policy. CIB Faktor CEO, Gaszton Gál’s experience is that more and more medium-sized and small companies are interested in credit insurance but receivables management solutions are lesser known and there is smaller demand for them. Companies still think of these as services which exist separately from factoring’s financing and risk assuming elements – despite that in many cases it is this third element of the service can constitute the biggest advantage. As of 30 June 2014 factoring has been added to the Central Bank of Hungary’s (MNB) ‘Funding for Growth’ programme. MNB give discounted refinancing forint loans to banks, which they can offer to SMEs as loan products, in the form of factoring too, at a maximum interest rate of 2.5 percent; the maximum duration is 3 years. The estimation of the Hungarian Factoring Association (MFSZ) is that factoring’s appearing in the MNB programme could entail a 15-20 percent increase in the number of loans granted but so far no significant expansion has occurred. Zsolt Major-Maróthy, the CEO of CE Faktor Zrt., opines that one of the main problems is that MNB only makes the financial resources available once a month but in the case of factoring the loan stock changes daily, so the service can’t be provided to customers continuously. Another problem is that independent factoring companies can’t use the MNB scheme in its current form, plus it can’t be used for funding state or European Union subsidies either. Factoring service providers’ experience is that neither very long payment periods nor circular debt are characteristic of the FMCG sector. Payment periods are shorter in the food industry and in agriculture than in retail and in the services sector. The conflict between Russia and the Ukraine is another major risk factor for food producers in Hungary and all over Europe. Russia’s answer to the sanctions imposed by the EU and the USA was boycotting meat and dairy products, fruits and vegetables produced in the EU. This is a big blow for Hungarian food industry companies. As regards selling abroad, the biggest risk is the lack of information on foreign partners. Hungarian firms have difficulties getting access to basic data on foreign companies. In this field it can constitute a step forward that Eximbank established the refinancing conditions for financing Hungarian export value by means of factoring. From this autumn the euro-based factoring service is available to companies of all sizes if their export meets Hungarian origin conditions. Good news for companies: the APR (Annual Percentage Rate) cannot exceed 5 percent.