Factoring—the sale of accounts receivables at a discount in exchange for cash—has emerged as an increasingly viable corporate finance option over the last decade. Since the turn of the millennium, world factoring volume has doubled, with an 8% compound annual growth rate (CAGR). Factoring in Turkey has outpaced this already-sharp trajectory, recording a 30% CAGR over the same period.
Factoring can provide funds even when banks may not because the focus is on the credit worthiness of a company’s customer, in contrast to bank lending that focuses on the creditworthiness of the borrower. While bank lending may often be cheaper than factoring, the latter offers unique benefits, particularly to SMEs that want to grow without going into debt.
Globally, factoring is growing faster than trade and GDP. World factoring volume is currently approaching $2 trillion. Among the EU 27, factoring turnover recorded a 17% growth in 2010 compared to 2009 figures, despite economic growth of only 1.8%. In Turkey, factoring saw 22.8% growth in 2010 compared to the previous period, with total assets reaching TL12.3 billion and total equity of TL2.7 billion.
There are a number of trends driving this expansion. Low risk financing products in general are increasingly favored in the post-2008 world. Legal frameworks for factoring are improving, and a number of regulatory standards, most noticeably Basel III, support the role of factoring in SME financing. International harmonization has eased the use of factoring, particularly for cross-border transactions.
In Turkey these trends are compounded by several homegrown variables that have made factoring more attractive relative to other financing options. Following the 2001 domestic crisis, the Banking Regulation and Supervision Agency (BRSA) imposed cautious limits on lending, making loans more difficult to obtain. On the leasing side, Turkey had reversed a tax incentive, raising the VAT rate on leasing transactions from 1% to 18%.
“If you are a medium to small or even a large sized company in Turkey and want to make an investment, you have few options,” says Özlem Mavi Saltık, General Manager of First Factoring, a German capitalized factoring company in Turkey. “You can go to a bank where you have to provide collateral and the credit processes are long, and at the end of the day the amount that you get is usually not enough for your requirements. You can turn to leasing, but the VAT advantage has disappeared. Banks are regulated, leasing is limited, only factoring remains.”
Factoring has existed in Turkey since 1998, with Garanti Factoring becoming the first exclusive factoring company in 1990. The industry’s watershed moment came in 2006, when factoring, previously regulated by the Undersecretariat of the Treasury, fell under the umbrella of the Banking Regulation and Supervision Agency (BRSA). Today the establishment of factoring companies is subject to the BRSA’s approval and subsequent control, and a minimum capital of TL5 million is required.
According to some industry experts, this regulatory shift has helped to correct a stereotype in Turkey that associated factoring with high rates and vulnerable clients. “Once new clients work with us, they understand the difference in pricing and service we provide,” says Saltık. “Now factoring companies have almost the same prices as the banks, but with better and much faster service.”
In addition to providing quick financing and the option of liquidity without debt, factoring also helps companies manage collections and accountancy, and provides them with valuable information on customers’ credibility.
“Right now factoring has a risk appetite and a customer focus,” says Saltık.
Despite high growth, factoring’s penetration rate is still low. Among the EU27, which represents 70% of the global factoring volume, penetration in terms of GDP in 2010 was 8.0%, up from 6.5% the year before. In Turkey that number was 4.5% in 2009, up from 3.4% in 2008.
As of 2010 there were 80 factoring companies operating in Turkey with 3,051 employees. A majority of these companies are bank subsidiaries. Turkey’s leading exports—textiles, construction, and automotive—account for 24% of factoring volume, highlighting the importance of factoring in external trade.
A new factoring law is currently under assessment and is likely to be in force by the end of 2011. The law will better define the legal framework and is expected to improve the functioning of the sector.
© The Business Year