06/09/2010
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Markus Ala
gtnews: Netting Expands to Factoring
Factoring is no longer a service only offered by finance
companies. It can now be equally well used as an in-house operation
between a subsidiary and a group treasury. The former can remove
its payment and currency risks, while the latter will gain benefits
of scale in currency transactions.
Today's web-based netting systems offer a wealth of
opportunities to further develop corporate financial processes and
make group-wide operations more efficient. For example, during the
past few years, OpusCapita has worked on a netting-based factoring
solution in co-operation with its customers. The experiences gained
have been most positive.
The well-known principle of factoring remains the same but the
composition of the three players has changed. In this new kind of
factoring, a subsidiary sells its invoices not to a finance company
but to its own parent company in exchange for money. This is
becoming popular within large groups.
Full Payment on Time Always Guaranteed
As described in the gtnews article The Netting Revival,
technology has rejuvenated treasury interest in netting as a cash
management process. Netting means that instead of having several
currency accounts and pondering over currency changes, the
subsidiary sells its internal invoices to the group treasury in a
risk-free way through the netting system.
Extending netting to factoring improves risk management. The
group treasury buys the internal sales invoices from the subsidiary
and takes on not only the currency risk but also the credit risk at
an early phase of the process.
As an example, when factoring with a finance company, the
subsidiary (the seller) usually gets 80% of the value of the sales
invoices right away. The remaining 20%, with expenses removed, will
be paid only after the finance company has received the payment
from the buyer. When factoring is carried out within a group,
payment is always guaranteed. The subsidiary gets 100% minus the
factoring fee at the agreed time. This is an example of how our
customers use factoring.
The additional benefit of factoring is that the subsidiary
always knows exactly how much it gets from the group treasury and
when, regardless of currency changes and the cash position of the
other subsidiary. This makes the subsidiary's financial position
lighter since it might not be able to carry the high risk. The
parent company, in turn, is usually in a more solid position to
handle the possible risk. The solution is especially suitable for
shared service centres (SSCs) or companies with a centralised
buying function.
Adding third parties, such as established vendors, to the
netting and factoring process can be a fascinating idea.
Technically this is fully possible but, as a process, requires
careful investigation.
Payment Conditions Based on Mutual Agreement
Before factoring is implemented internally, there are several
details that the subsidiary and the group treasury have to agree
on. For example, does the seller get the payment right away or does
the seller have to wait until the group treasury has received the
payment from the buyer?
To cover its expenses for providing the service, the group
treasury charges a factoring fee from the seller. Alternatives are
usually a fixed price or a fixed percentage of the total of the
sales invoices.
Also Suitable for Smaller Companies
Whereas large corporations prefer to have a netting system with
factoring implemented locally, smaller groups can benefit from
these functions without buying a system of their own. They can
acquire the solution as a service. For example, starting this
autumn, OpusCapita will extend its service offering to cover
netting, too.
The implementation and use of netting combined with factoring
could not be easier. Implementation is fast, ideally in the
plug-and-play style. The application is used through an internet
browser, which eliminates the need for installation and technical
knowledge at the customer's end. Instead of large investment, the
software is paid for at regular intervals according to actual
use.
Risks in Factoring
When talking about internal factoring, some risks are not very
likely to occur. These can include external fraud by clients,
counterparty credit risk related to clients and risk covered
debtors.
Operational risks, such as contractual disputes, are relatively
easy to avoid. For instance, by using a dispute handling function,
disputes can be solved within a system. The technological
development that has occurred during the past 10 years has
generally reduced ICT-related risks.
However, legal, compliance and tax risks cannot be ignored. Laws
and regulations in the countries, where entities are located, need
to be studied before implementing internal factoring.
Conclusion
Netting, when combined with factoring, can be used as an
in-house operation between a subsidiary and a group treasury. The
process provides several benefits. Internal factoring improves risk
management and makes the subsidiary's financial position lighter.
The solution is especially suitable for SSCs or companies with a
centralised buying function, and it is an alternative worth some
serious consideration when a corporation wants to further develop
its financial processes.
