Factoring as an important pillar for business development

Business financing of companies with financial instruments adapted to the nature of activity of each company is one of the key factors for development. Factoring can be highlighted as one of the best solutions for stabilising cash flow and optimising working capital. There are great examples of domestic companies that make optimal use of factoring. 

“Working capital and its management is an important indicator of a company’s financial health and helps to assess a company’s ability to cope with unforeseen financial challenges. Working capital is the difference between a company’s current (less than one year) assets and current liabilities. Positive working capital indicates that the company is able to service its current liabilities and invest in the company’s growth," says Jānis Moisejs, Head of Factoring at SEB. Negative working capital, on the other hand, can indicate financial problems that affect the company’s ability to pay supplier bills and fulfil obligations to creditors.

Companies’ working capital is currently influenced by several important factors. For example, the number of job vacancies in Latvia fell by 4.4% in Q2 2023 compared to the same period last year, which means that companies are increasingly facing rising labour costs. In addition, consumer price growth has reached 5.4% compared to August last year. Since August 2015, the price increase has totalled 44.3%. This increases consumer prices and reduces profit margins. Financing costs have also risen; for example, the Euribor rate for the 3-month period from August 2022 to October 2023 has risen from 0.246% to 3.964%.

Rising costs are putting more and more pressure on companies’ working capital, so they are increasingly interested in various factoring products with which they can balance their cash flow. Compared to the third quarter of the previous year, SEB factoring portfolio grew by more than 12%, reaching an all-time high. It should be noted that recourse factoring recorded rapid growth - the portfolio grew by 25.6% compared to the previous period. Although factoring is suitable for every company, it is most popular with manufacturers and wholesalers. 

Factoring vs. reverse factoring

Factoring enables companies to sell their receivables to a bank and receive immediate cash flow in return. Factoring can also be used to take out insurance to screen a potential business partner. SEB classic factoring solution is one of the most competitive solutions on the market.

Conversely, reverse factoring, also known as supply chain financing, allows suppliers to sell their receivables to the buyer’s financial institution. This helps companies improve their supplier relationships and ensure a stable supply chain by extending payment deadlines for their suppliers and receiving a purchasing discount due to the difference in credit risk between the larger buyer and the supplier. This solution creates a win-win situation for both the buyer and the supplier. The buyer optimises its working capital, while the supplier generates additional operating cash flow and thus reduces risks in the supply chain.

Typically, the customer of reverse factoring is a company with a very good risk rating, such as state-owned companies, international organisations or local companies with high turnover and stable financial performance. In contrast, the supplier is usually a newly established company or a company that already has large financial obligations and whose risk rating has deteriorated and, consequently, no additional financing is available at all. There is therefore a considerable difference in the assessment of credit risk between the two companies. This in turn offers the possibility of risk arbitrage, i.e. the restructuring of risks.

The largest sectors in which reverse factoring is used are telecommunications, IT, agriculture, retail and construction. As a leading corporate financier, SEB has in the past and is currently discussing reverse factoring opportunities with Latvian large corporates as well as with leading companies in the SME segment to strengthen and improve the financing of their supply chains.

The non-banking factoring market has been growing steadily in recent years, and platforms have emerged in the market that combine the offerings of several factoring providers in a single place. Compared to the Lithuanian and Estonian factoring markets, the Latvian market is two to three times smaller, which also explains the emergence of new factoring companies in the Latvian market. Of course, non-bank solutions are many times more expensive. Therefore, before finalising the choice of a financier, we recommend that companies obtain a classic and reverse factoring offer from a large bank. We realise that our customers appreciate SEB broad customer base, which enables us to solve receivables-related payment problems quickly and find solutions even in the most difficult market conditions.

Ambergs shares its experience: Establishing strong ties with suppliers in Europe is key

Ambergs has been trading in building materials and interior decoration in Latvia for 27 years. The key to the company’s successful development has been its ability to build and maintain stable and long-term relationships with European suppliers, which enables them to offer particularly high-quality materials and furnishings in the Latvian market. The company’s customers are local building materials retail chains, construction companies and property development companies as well as private individuals.

Ambergs board member Andris Tēraudkalns emphasises that the aim of the company’s activities has always been to use high-quality and energy-saving materials and durable equipment in Latvian construction. “Customers have become more enlightened in recent years and attach more importance to sustainable and high-quality products," he points out.

The key added value for the company’s ability to compete in the saturated building materials market is the historically grown relationships with suppliers in Europe (especially in Germany, the Netherlands and Italy) who can offer exceptional goods of high quality and durability. A. Tēraudkalns cites as examples the trade in lighting and sensor devices as well as sanitary and construction tools, where Ambergs is able to offer specialised products that are in demand in both wholesale and retail.

An important feature of Ambergs is its ability to adapt quickly to changes in demand and trends. While the delivery of large quantities of cheaper products, e.g. from China, requires several months’ lead time, Ambergs is able to ensure the delivery of new goods from Europe within a few weeks. The company’s wholesale partners are the large building materials trading companies (Ksenukai, Kurši, etc.) operating in Latvia and other Baltic states. As such, Ambergs intends to expand its activities beyond Latvia.

Regarding the contribution to the company's daily operations, A. Tēraudkalns emphasises that factoring stabilises the company’s cash flow. The deferment of payment for sellers of goods ranges from 90 to even 120 days, while supplier bills must be paid within 45 days. The difference between the two payment dates can be financed with the help of factoring, making it a particularly suitable financial instrument for retailers. In the past, the company has also worked with non-banking financiers, but in recent years it has found that the bank’s factoring offer is much more profitable.

Jānis Moisejs, Head of Factoring at SEB