International opportunities in the crisis

The start of the financial crisis did little to stop the boom in the German export industry in 2008. Germany may yet defend its title as ‘export world champion’. The export of goods actually increased in 2008, although not as much as it did in previous years (in 2007 the growth rate amounted to 8.1%). In 2008 the export of goods increased by 3.1% to €995 billion.

At the same time the import of goods into Germany increased as well, up 6.3% to €819 billion. The growth of international trade is also reflected in the success of the international factoring business in Germany. This growth has meant that import and export factoring volumes together increased by 21.4% to €30.15 billion, exceeding €30 billion for the first time.

Regarding the development of international factoring in Germany, its market share among the 26 members of the German Factoring Association has increased to 30% – in 2001 the percentage of international factoring only amounted to slightly more than 20%. In the meantime, the consequences of the financial crisis have reached the German export industry, which was able to report successful development up until the second half of 2008.

The challenges for export-oriented medium sized companies are not minor ones. There are justified hopes that the export industry will again be stimulated, particularly by increasing demand from China. The Euro zone and the US economy may also follow this positive trend in the second half of this year. However, a sudden growth in the number of orders being placed, economically seen as a “V curve” (the result of a relatively quick turnaround in the economic downturn) which appears likely in the Asian economies, incorporates special risks for exporters.

The end of a recession is often followed by the placement of many new orders by importers, who want to benefit from decreased purchase prices. Since most of the suppliers are forced to shrink their working capital and stock during the recession, this situation requires from the exporter immediately available liquidity and capacities to fulfil the new orders. This can mean that exporters can suffer from a lack of liquidity, especially in case of long payment terms (more than 60 days), which is often the case in export business. Other export risks related to the recession include the significantly deteriorated payment morals of foreign buyers and the considerably increased insolvency risk, which can have an additional negative impact upon the export industry.

Factoring provides exporters with a solution to increases in their export turnover volume. At the same time they are able to dispose of liquidity, whilst being 100% protected against bad debt. When choosing a suitable factoring company it is important that the respective company has sufficient language knowledge and market know how, as well as experience of the payment habits in the country of the buyer so that the receivables’ management and collection procedures can be handled smoothly.

Export factoring provides a number of advantages to German exporters looking for funding and security in these economically uncertain times. As the German export factor pays the exporter up to 90% of the receivable’s purchase price immediately and as the funding grows in parallel with the turnover, fresh liquidity will be available immediately and in a flexible way.

Furthermore, factoring is generally provided in Germany without recourse. This facilitates the exporter’s liquidity planning, since the exporter does not have to include delayed debtor payments and bad debt into their export strategy (the business being 100% protected against bad debt within the signed credit limit). Moreover, the exporter can provide flexible open account terms and thus increase the business’ sales potential. The sale of receivables without recourse has another positive effect for the exporter: the purchased receivables are transferred from the balance sheet of the exporter to the balance sheet of the export factor, improving the exporter’s balance sheet structure. The optimized balance sheet ratios of the export factor will then have a positive impact on his house bank’s rating.

The export factor also continually examines the creditworthiness of foreign debtors and takes care of legal actions, if necessary. In the 2 factors system exports are handled in the same way as they are in domestic business. Since the importers are attended to by experienced local import factors, neither language nor cultural barriers have to be overcome. This normally has a positive impact on the payment morals of the importer. Furthermore, the importers pay into the account of the import factor in their own country thereby saving bank fees usual in international account transactions. Another advantage of international factoring is that the administrative workload and the related costs can be lowered in comparison to the use of letters of credit, where the importer is required to present a letter of credit in favour of the exporter to his bank in order to secure the business. Besides the costs of opening and approving letters of credit, the credit line of the importer will be restricted to the approved amount.

In 2009 some export industries – especially those dealing with the Asian region – have continued to count on increasing and recovering demand for German export goods. However, it is very uncertain whether increasing demand will stabilize globally or whether it will stay very volatile and limited to some industries and regions. The flexible availability of liquidity and the securitization of export growth are two decisive factors impacting upon export oriented medium sized companies.

International factoring provides a modern, flexible and global financing solution since collectable export receivables can be transferred immediately into liquidity, with levels of funding growing in parallel to turnover volume. The optimisation of the liquidity situation can be brought about by the securitization of turnover growth and from the exploration of new business opportunities. These represent important advantages that can contribute to the global competitiveness of the exporter.

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