Egypt Factors: Financing trade in times of turmoil.

CAIRO: At times of global financial turmoil, companies can fall victim to tightened credit conditions from commercial banks. But when money gets tight, factoring companies thrive.

With Egypt's first factoring company now up and running, local exporters can turn to a less traditional source of finance to ensure they have access to credit.

"At times like these when liquidity is an issue, we have a very good opportunity in the market," said Marius Savin, general manager of newly-established Egypt Factors.

"Several traders in Egypt have long been suffering from lack of finance, and this tool [factoring] provides them with the liquidity they need."

A joint venture with the Commercial International Bank (CIB), FIMBank, and the International Finance Corporation (IFC), Egypt Factors is the country's first trade finance company that seeks to promote cross-border trade.

Established just a few months ago, the company injects liquidity into trade-oriented companies and guarantees that large as well as small-and medium-sized exporters have access to finance that will sustain their operations.

"We act as a one-stop shop for trade. We offer upfront cash, collection and protection services for traders so that they can sleep at night and not worry about [lack of credit]."

Factoring -- also called receivables financing -- enables a company to borrow money against outstanding invoices. The company providing the credit -- called the factor --is experienced at collecting the receivables, even during slow business periods.

A factor will undertake the collection activity to secure payment on invoices, while advancing cash to the company, which eventually helps keep the economy moving.

Egypt Factors provides a package of services that guarantees trade companies will have enough cash flows into their systems. The company finances up to 90 percent of invoices, collects invoices, and protects bad-debt by paying defaulted debts on their clients' behalf, freeing exporters of the risk that a purchaser might not be able to pay.

"We are very flexible in what we offer. C*We offer a combination of factoring services, and clients can pick and choose what they want to use," Savin pointed out. "For example, we have clients that don't want financing services because they have their own money, but they want to make sure that they get their money [back], so we only provide them with services package (assessment and collection)."

IFC -- a member of the World Bank Group -- signed an agreement in 2005 to invest $3 million for a 20 percent equity stake in Egypt Factors. Other sponsors were FIMBank and CIB which each holds a 40 percent equity share.

"Providing risk mitigation to encourage trade with new and challenging markets is a priority for us now more than ever," Nada Shousha, IFC country officer in Egypt, said in a press statement. "Egypt Factors will promote alternative trade finance products to benefit smaller businesses and spur economic growth. We expect that it will introduce industry best practices in Egypt and provide a model for others to replicate."

Though the agreement was signed almost three years ago with Egypt's General Authority for Free Zones and Investment (GAFI), Egypt Factors only began operations a few months ago. "It took a while to be incorporated in the legal system," said Savin, explaining that Egypt did not have the necessary legal code to register a factoring company at that time.

Up until now, Egypt Factors managed to capture 20 clients that operate in different sectors such as textile and ready-made garment, chemicals, automotives and food processing.

"Anything that is trade-related is by nature factorable," said Ahmed Shaheen, general manager for Egypt Factors. He clarified that factoring includes all fast moving consumer goods.

"It can go to furniture, tableware, sanitary ware," Savin added. "It's a business-to-business relationship. We don't finance retail sales or individual clients. We [only] finance sale of products to other distributors/companies."

However, at times when financing has proven risky business with several big banks taking a severe beating by the global financial upheaval, Egypt Factors argues the time is now more opportune than ever to enter the Egyptian market.

"This is not a bad timing. On the contrary, this is the time where we can support trade and bring in value-added services to the market," Savin explained. "At times like these, we provide a source of stability to the trading businessC*. We are in the risk-management business, and we know how to manage risk. Our expertise comes mainly from our shareholders."

Egypt Factors is currently looking into assessing 100 potential clients that have approached the company. "We serve all sort of companies.C* We have on board some of the biggest names in the trading businessC*but we give particular attention to SMEs because they usually lack financing and protection services," Shaheen pointed out. "And factoring is one of the best tools for SMEs to receive funding and sustain their growth."

However, both company executives pointed out that it was often more challenging to reach SMEs in Egypt. "Large companies are already aware of services we offer, but SMEs need to be educated about factoring," Shaheen explained.

While banks can only provide loans to companies that require credit, Egypt Factors provides a more comprehensive package, he added. "We provide a full package of services in terms of financing, collection and protection. But banks only provide funding."

Egypt Factors provides services to both Egyptian exporters and importers. "We deal with Egyptian importers, too. We can pay for their supplies, and they can pay us back at a later stage. That way enables them to get discounts because they pay for products upfront."

The company also shores up liquidity for companies that cater to domestic as well as global markets.

While factoring is still at its early stages in Egypt, companies operating in this line of business can bump into some challenges. As is the case with more mature markets, governments treat factoring services as subsidies so as to boost trading.

"This means that a certain percentage of a client's exports is considered a subsidyC*which in the end helps exporters [reduce costs]," Savin explained.

"We are still negotiating with Egyptian authorities to issue a certificate that qualifies [factoring] as a subsidy," he added. If this procedure is approved, "Egypt Factors certifies that it collected the payment from its client, who then qualifies for a subsidy."

Another challenge that Egypt Factors is currently trying to conquer is getting the Egyptian government to establish a factoring "free fund."

"By virtue of a free fund, the state reimburses financing charges, and that way clients will only pay for service charges [assessment and collection]," he clarified. "That way factoring becomes a low-cost service."

To read the other stories in our bi-monthly special focus on Egypt's capital market, click here: http://thedailynewsegypt.com/article.aspx?ArticleID=18081 http://thedailynewsegypt.com/article.aspx?ArticleID=18080 http://thedailynewsegypt.com/article.aspx?ArticleID=18079 http://thedailynewsegypt.com/article.aspx?ArticleID=18078

Daily NewsEgypt 2007

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