The Decision to Finance Account Receivables: The Factoring Option

Author(s): Khaled Soufani

Source: Managerial and Decision Economics, Vol. 23, No. 1 (Jan. - Feb., 2002), pp. 21-32
Published by: John Wiley & Sons
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MANAGERIAL AND DECISION ECONOMICS
Manage.
Decis.
Econ. 23: 21-32
(2002)
DOI:
10.1002/mde.1046
T h e Decision t o F inance Account
Receivables: T h e
F act oring Op t ion
Kh aled Soufani*
Dep art ment of F inance, Joh n
Molson Sch ool
of Business, Concordia
Universit Yl,
1455 de Maisonneuve Blvd
West ,
Mont real,
Que.,
Canada H3G IM8
F act oring
is a financial service
enabling ent erp rises
t o sell t h eir account s receivable t o
a
fact oring comp any
in
exch ange
for cash . T h e market for
fact oring
in t h e UK h as been
growing
at subst ant ial rat es and most
banking
inst it ut ions are now
act ively
involved in
p roviding
t h is service. Lit t le research on t h e
fact oring
market
current ly
exist s and so t h is
p ap er
seeks t o
p rofile
t h e det erminant s
influencing
decision
making
in t h e UK
fact oring
indust ry. Using
dat a from an int erview-based
survey,
t h is
p ap er
est ablish es t h at t h e decision t o
p urch ase
an
ent erp rise's
account s receivable is influenced
by
t h e
ent erp rise's size, t yp e
of
p roduct
or service it
offers, indust ry, sect or, age, t yp e
of
cust omers,
financial
st at ement ,
t h e
management t eam, op erat ional suit abilit y, collect abilit y
and credit not es.
Cop yrigh t
,
2002
Joh n
Wiley
&
Sons,
Lt d.
INT RODUCT ION
F act oring
account receivable is an economic
decision
wh ereby
a
sp ecialized
firm assumes t h e
resp onsibilit y
for t h e administ rat ion and cont rol
of a
comp any's
debt or
p ort folio.
It can be
considered t o be a met h od of
raising
sh ort -t erm
cap it al
based on t h e
selling
of t rade debt s at a
discount ,
or for a
p rescribed
fee
p lus
int erest . T h e
mech anism of
fact oring
involves int eract ions
bet ween t h ree
t yp es
of firms or economic
agent s:
t h e client
firm,
t h e cust omer
firm,
and t h e fact or.
T h e
fact oring comp any p rovides working cap it al
for t h e client firm
by exch anging
t h e account
receivable for cash . It assumes t h e credit risk for
t h e
accep t ed account s,
and t h erefore t akes full
resp onsibilit y
for t h e
solvency
of such cust omers
t o t h e ext ent of t h e
accep t ed
or
ap p roved
amount s
(i.e. p rovision
of credit
management ).
It also
ch ecks t h e credit and collect s t h e account s of t h ese
cust omers
(i.e.
sales
account ing services).
T h e
fact oring
market in t h e UK h as been
growing st eadily
from bot h t h e
sup p ly
and
demand sides.
During
t h e 1990s, it recorded a
21% annual
average growt h
rat e wit h a t ot al
t urnover of about ?48 billion
(F act ors
and
Discount ers Associat ion
(F DA), 1999).
T h e fac-
t oring indust ry p rovides working cap it al
t o over
25000 businesses t h at
emp loy
more t h an h alf a
million
p eop le
in t h e UK and is est imat ed t o
cont ribut e around 6% in addit ional finance t o
SMEs,
comp ared
t o
6.5% p rovided t h rough
vent ure
cap it al (Bank
of
England, 1999).
Soufani et al.
(1999)
observe t h at t h ose
small businesses wit h a t urnover of less
t h an ?3 million
p er
annum const it ut e t h e
major
force beh ind t h e
growt h
of t h e market .
Small firms face
unique
financial
p roblems
in
t h eir
relat ionsh ip
wit h t h e
cap it al market , e.g.
credit rat ioning (St iglit z
and Weiss, 1981)
or a
finance gap (St orey, 1994;
Mason and
Harrison,
1993;
Binks and
Ennew, 1994, 1996, 1998).
All t h ese st udies
emp h asize
h ow
asymmet ric
informat ion influences t h e decision of t h e
credit or t o limit t h e flow of credit inst ead of
using
int erest rat es as an element in
det erring
demand.
*Corresp ondence
t o: Kh aled
Soufani, Dep art ment
of
F inance,
Joh n Molson Sch ool of
Business, Concordia
Universit y,
1455
de Maisonneuve Blvd. West , Mont real, Que.,
Canada H3G
1M8. E-mail:
ksoufani(ajmsb.concordia.ca
Cop yrigh t
( 2002 Joh n
Wiley
&
Sons,
Lt d.
22
KHALED SOUF ANI
Desp it e
t h e
imp ressive develop ment
of t h e
fact oring market , lit t le academic work h as been
conduct ed t o
exp lore
and evaluat e t h e
relat ionsh ip
bet ween t h e
fact oring indust ry
and small-t o-
medium size firms. T h is
sh ort age
in academic
out p ut
on
fact oring
does not
only
relat e t o t h e UK
but also t o t h e US and most ot h er indust rialized
count ries.
Exist ing
st udies on
fact oring
h ave
focused
p rimarily
on
analyzing
t h e client firm's
decision t o use
fact oring
in t h e cont ext of t h e
demand side. F ew h ave addressed t h e
sup p ly
side
of t h e
fact oring market ,
i.e. t h e
fact oring comp a-
nies. T h is
st udy
addresses t h is
p aucit y
in t h e ext ant
lit erat ure.
T h e remainder of t h e
p ap er
is as follows:
first ly,
we
briefly
review t h e
fact oring
lit erat ure and
discuss t h e role of t h is financial service. We t h en
evaluat e t h e det erminant s t h at influence t h e
decision made
by fact oring comp anies
t o
sup p ly
financing
t o businesses. Based on t h e
findings,
we
est ablish t h e
argument
t h at firms
facing
difficul-
t ies in
obt aining
finance
t h rough
t radit ional
banking
services such as sh ort -t erm loans and
overdraft facilit ies can
exp lore fact oring
as a
way
of
imp roving
financial cont rol and t h eir
working
cap it al requirement s t h rough increasing
cash
inflow.
RELAT ED LIT ERAT URE
Lit t le
syst emat ic
work h as
act ually
been under-
t aken t o est ablish t h e role of t h e
fact oring indust ry
and t h e
p rofile
of businesses
const it ut ing
it s client
base.
However, some effort s h ave been made t o
st udy
t h is area. Mian and Smit h
(1992)
use US
dat a t o sh ow t h at it is
p ossible
t o
develop
a robust
t h eory
t h at can be
emp irically
t est ed wit h
regard
t o
account s receivable
management p olicy. T h ey
discuss several
h yp ot h eses
relat ed t o t h e decision
t o fact or account s receivable. F or
examp le, t h ey
h yp ot h esize
t h at if firms h ave a cost
advant age
and
market
p ower,
and t h at t rade credit is t axable as
an inst allment sale, t h ere is a reduced
p robabilit y
of
using fact oring. T h ey also
h yp ot h esize t h at if
t h e firms' cust omers are
geograp h ically diverse,
t h at t h e firm
exp eriences seasonal sales and t h ere is
bot h a manufact urer and cust omer concent rat ion
in t h e market , t h en
again
t h e
p robabilit y
of
using
fact oring diminish es. In addit ion, Mian and Smit h
(1992) h yp ot h esize t h at
selling direct ly
t o wh ole-
salers reduces t h e likelih ood of
fact oring
use as
op p osed
t o
selling
t o ret ailers.
Smit h and Sch nucker
(1994)
conduct an
emp iri-
cal examinat ion of
organizat ional st ruct ure, in
wh ich
t h ey
focus on t h e demand side of t h e market
in t h e US.
T h ey
find t h at economies of scale h ave
an
imp act
on t h e decision t o
int egrat e,
because
credit
management
int ernalizat ion is
great er
wh en
bot h t h e
selling
firm is
larger
and t h e
p ercent age
of
t rade credit cust omers is
h igh er. F urt h er, t h ey
find
t h at t h ere are ot h er
p aramet ers relat ing
t o
t yp e
of
cust omer, t h e
p revalence
of informat ion and
monit oring
cost .
More
recent ly,
Summers and Wilson
(2000)
st udy
a cross-sect ional
samp le
of 655 manufact ur-
ing
firms in t h e UK. T h eir
p ap er develop s
and t est s
h yp ot h eses
t h at
exp lain fact oring
as a ch oice for
credit and financial
management p olicy. T h ey
analyze
t h e demand side of t h e market and find
t h at t h e mot ivat ion t o use
fact oring p rimarily
ap p ears
t o be relat ed t o, and influenced
by,
t h e
overall demand for asset -based forms of
financing
mainly by
smaller
comp anies. T h ey
do not find
st rong
evidence t o
sup p ort
t h e view t h at demand
for t h e
fact oring
service is due t o t h e
organiza-
t ional st ruct ure of t h e
firm,
wh ich in t urn is relat ed
t o t h e t ransact ion cost
t h eory
of t h e
organizat ion.
T h e
p aramet ers t h ey
use t o measure t h e
organiza-
t ional st ruct ure
p ert ain
t o t h e t ime it t akes t o
get
t o know
cust omers, sales
going
t o
p roducers,
wh olesalers, or wh et h er t h e
p roduct
is cust omized.
In
addit ion,
t h ey
examine t h e ext ent t o wh ich sales
p eop le acquire
informat ion on t h e credit wort h i-
ness of
cust omers, t h e
frequency
of orders
p laced
by
t h e
buyers,
and t h e firm's cash flow. Summers
and Wilson
suggest
t h at t h ese t ransact ion cost
p aramet ers
h ave less
imp act
on t h e decision t o use
fact oring.
A
st udy by
Soufani
(2000b)
examines t h e ch oice
of
fact oring
as a source of business
financing
and
t h e
t yp e
of businesses
using
it in t h e UK. It finds
t h ose
demograp h ic
ch aract erist ics such as
age,
t urnover,
t yp e
of
indust ry,
and forms of
ownersh ip
influence t h e decision t o sell account s receivables.
F urt h ermore, t h e st udy
finds firms
exp eriencing
financial difficult ies
may op t
for t h e fact oring
op t ion
if
t h ey
do not h ave access t o some form of
credit from ot h er financial inst it ut ions or lack
sufficient collat eral. A furt h er
st udy
of t h e
sup p ly
side
by Soufani (2000a)
finds anecdot al evidence
t o
sup p ort
t h e exist ence of a
relat ionsh ip bet ween
t h e
demograp h ic
ch aract erist ics of t h e fact oring
Cop yrigh t
C 2002 Joh n
Wiley
&
Sons,
Lt d.
Manage.
Decis. Econ. 23: 21-32
(2002)
DECISION T O F INANCE ACCOUNT RECEIVABLES 23
comp any's
client s
(such
as
size, age, sect or,
and
ownersh ip
st ruct ure of t h e client
firm)
and t h e use
of
fact oring. However,
t h e
p ap er
does not address
wh et h er t h ere are ot h er element s t h at
may
h ave an
effect on t h e decision t o
sup p ly fact oring
such as
t yp e
of
cust omers, management ,
financial st at e-
ment s, p rofit abilit y, collect abilit y, op erat ional
suit abilit y,
or indeed
any
ot h er feat ure t h at
may
influence t h e
fact oring
decision from t h e
sup p liers
p ersp ect ive.
In
summary,
t h e ext ant
fact oring
lit erat ure
examines t h e det erminant s t h at influence t h e
decision t o finance account s receivable
by using
dat a
gat h ered
from t h e demand side of t h e market
(i.e.
t h e client s of t h e
fact oring comp anies).
T h is
lit erat ure sh ows t h at
fact oring comp anies
oft en
claim t h at
t h ey p rovide
an alt ernat ive form of
financing
for small
sized, young,
and fast
growing
firms
op erat ing
in a
sp ecific
business
act ivit y (e.g.
Hawkins, 1993;
Smit h and
Sch nucker, 1994;
Bickers, 1994).
If t h is is
t rue,
t h en it will be
reflect ed in t h e economic decisions of t h e
sup p liers
of
fact oring
services.
However,
t h ere is a need t o
assess t h e decision crit eria used
by
t h e
fact oring
comp anies (i.e. gat h ering
informat ion from t h e
sup p ly
side of t h e
market ).
T h is
st udy
fills t h is
gap
in t h e lit erat ure
by analyzing
informat ion collect ed
from
sup p liers
of
fact oring services.
T HE ROLE OF F ACT ORING
T h e fact or is a
sp ecialized t yp e
of eit h er
p rivat ely
or bank-owned finance
comp any
t h at
p urch ases
account s receivable from a client firm and t h en
receives
p ayment s direct ly
from client s' cust omers.
T h ere are t wo
t yp es
of
fact oring:
recourse fact or-
ing,
wh ich ent it les t h e
fact oring comp any
t o claim
p ayment direct ly
from t h e client in t h e event t h at a
client 's cust omer default s on
p ayment ,
and non-
recourse
fact oring,
wh ich does not involve such a
p rovision. F act oring comp anies usually combine
bookkeep ing,
credit insurance and
financing as
p art
of t h eir overall services
(see F igure 1).
It is
imp ort ant
t o make a dist inct ion bet ween
bank-owned fact ors and
indep endent ly owned
fact ors because of t h e
resp ect ive
size of each
group .
T h e evidence from t h e market
suggest s t h at
bank-owned fact ors are
larger
in t erms of t ot al
t urnover and number of
emp loyees
and t h at
t h ey
account for about 93% of t h e market
by t urnover.
F F ACT ORING F IRM
(3 (5)
(4(
(7)
(6
(1)
Sup p lier (Client ) Client 's Cust omer
(2)
(1)- Cust omer Places order t o t h e
sup p lier.
(2)-
F irm
sup p lies goods
and issues invoices.
(3)- Sup p lier
firm
request s financing
and
p rovides
t h e debt or book
(Sales Ledger).
(4)- F act oring comp any
advances cash
against
invoices once
ap p roved
based on t h e informat ion.
(5)-
T h e cust omer firm is
exp ect ed
t o makes full
p ayment
t o t h e
fact oring comp any
wit h in a
st ip ulat ed p eriod
of t ime.
(6)-
T h e
fact oring comp any ch arges
fees and int erest t o t h e
sup p lier.
(7)-
If t h e cust omer firm default s on
p ayment ,
t h e client firm must
rep ay
t h e
fact oring
firm.
F igure
1. T h e
fact oring
mech anism.
(1):
cust omer
p laces
order t o t h e
sup p lier; (2):
firm
sup p lies goods
and issues
invoices; (3): sup p lier
firm
request s financing
and
p rovides
t h e debt or book
(sales ledger); (4): fact oring comp any
advances cash
against
invoices once
ap p roved
based on t h e
informat ion; (5):
t h e cust omer firm is
exp ect ed
t o make
full
p ayment
t o t h e
fact oring comp any
wit h in a
st ip ulat ed p eriod
of
t ime; (6):
t h e
fact oring comp any ch arges
fees
and int erest t o t h e
sup p lier;
and
(7):
if t h e cust omer firm default s on
p ayment ,
t h e client firm must
rep ay
t h e
fact oring
firm.
Cop yrigh t
( 2002 Joh n
Wiley
&
Sons,
Lt d.
Manage.
Decis. Econ. 23: 21-32
(2002)
24
KHALED SOUF ANI
Indep endent ly
owned fact ors are smaller in t erms
of t urnover and
p rovide
t h eir financial services t o
about 7% of t h e market . T h e dist inct ion bet ween
t h e t wo
t yp es
of
fact oring comp anies
based on size
may
h ave an effect on t h eir financial decision t o
offer
fact oring
due t o t h e
availabilit y
of resources
or informat ion about t h e client firms. F or clear
microeconomic
reasons, such as
cost s, and risk
exp osure,
t h e role
p layed by
smaller and
larger
fact oring comp anies
differ.
Larger fact oring
com-
p anies enjoy
economies of
scale,
h ave access t o
more
funds,
and can
acquire
more informat ion
t h rough
t h e
p arent
bank at
relat ively
lit t le cost .
T h erefore,
t h ey
can finance and
p rocess larger
invoices and can
diversify
t h eir client base. In
cont rast ,
smaller fact ors h ave limit ed resources
and
may
be unable t o
cop e
wit h
larger
client firms
(p ossibly
in t h e
manufact uring sect or),
wh ich h ave
larger working cap it al requirement needs, great er
t rade credit s and or more lat e
p ayment s.
Conse-
quent ly,
smaller fact ors
may op t for,
and
acquire,
t h e more
marginal
business t h at is concent rat ed on
t h at end of t h e small business sect or ch aract erized
by
lower
t urnover, smaller size and number of
invoices.
Cent ral t o t h e
analysis
of
financing
is t h e
exist ence of
asymmet ric informat ion;
it is assumed
t h at t h e firm h as more 'inside' informat ion about
it s real
p erformance
t h an an
'out sider',
sp ecifically
t h e
fact oring comp any.
T h e
fact oring
firm
usually
h as access t o t wo
t yp es
of informat ion:
sp ecific
informat ion p ert aining
t o t h e sales
ledger
of t h e
client firm and
general informat ion p ert aining
t o
t h e market as a wh ole. T h e
fact oring
firm is
usually knowledgeable
about t h e
p erformance
of
t h e client s and cust omers in
any sp ecific indust ry
or sect or. F or
examp le,
if t h e fact or were act ive in
t h e t ext ile
indust ry
t h en it would be in a
p osit ion
t o
know almost all t h e
p layers
in t h is
indust ry
because
t h ey
are t h e cust omers of it s different
client s.
T h erefore,
it would h ave informat ion
about t h eir
p ayment p erformance
t owards each
sup p lier (i.e.
fact or's
client ). However,
a
single
firm
is not in t h e same
p osit ion
and can
only
assess t h e
credibilit y
of t h e cust omer based on it s own
exp erience wit h it . T h e essent ial
p oint
is t h at
access t o det ailed informat ion about client 's
cust omers will assist t h e fact or in
making informed
economic decisions. T h e dist inct ion bet ween in-
dep endent ly and bank-owned fact ors could also be
significant
in t h is
asp ect . Bank-owned fact ors can
enjoy
access t o lower cost , firm
sp ecific informa-
t ion
regarding
credit ch ecks, t h e
management
t eam,
op erat ions
of account s,
p ayment p at t ern
et c, t h an t h e smaller
indep endent
fact ors wh ich
may
incur
h igh er
cost s, t h us
affect ing
t h eir
decision t o offer t h eir services and t h eir ch oice of
client firms.
T h erefore, ident ifying
t h e
sp ecific
informat ion
t h at t h e fact or
request s
from businesses can
p rovide
valuable informat ion t o
academics, busi-
nesses and
p olicy
makers
regarding
t h e det ermi-
nant s of t h e invoice
financing
decision. T h e dat a
collect ed from UK
fact oring comp anies
will
at t emp t
t o sh ed some
ligh t
on t h e
p aramet ers
t h at
influence t h e
managerial
decision
making
in t h e
fact oring indust ry.
DAT A AND MET HOD OF ANALYSIS
T h e result s
p resent ed
in t h is
p ap er
are based on t h e
analysis
of
p rimary
dat a collect ed
t h rough
21 face-
t o-face int erviews wit h execut ives of
fact oring
comp anies
t h at are members of t h e F DA in t h e
UK. Nine of t h e
fact oring comp anies
are bank-
owned and 12 are
indep endent ly
owned. T h e
int erviews were semi-st ruct ured and consist ed of
a number of
op en-ended,
closed-ended and Likert
scale-t yp e quest ions.
T h e
survey
addressed areas
relat ing
t o t h e ch aract erist ics and
p rofile
of t h e
businesses
using
t h is financial service. A number of
quest ions
addressed issues
p ert aining
t o t h e
p rocess
and mech anics of
fact oring,
and t h e
decision
making p rocess
and risk assessment . T h e
int erviews h ad an
average
durat ion of
ap p roxi-
mat ely
I h . T o ensure
consist ency
in
conduct ing
t h e
survey
and t h e
asking
of
quest ions,
one
p erson
(t h e aut h or)
used an aid-memoire
quest ionnaire
as
a
guide
for all t h e int erviews carried out .
All 21
samp le
firms were members of t h e F DA
sup p lying fact oring
services in
England
and Wales
wh ere t h e t ot al
fact oring
market in 1998 was
over ?40
billion. T h e
samp le comp anies
account ed
for about 98%
of t h e
fact oring
market in t erms
of t urnover. T h e fact oring market in t h e UK is
concent rat ed in favor of t h e bank-owned
fact ors, wh ich cont rol (as ment ioned earlier)
close t o 93%
of t h e market , by
t urnover. Since
t h e
samp le rep resent s nearly
t h e ent ire
p op ula-
t ion of t h e market in t erms of market sh are
and number of businesses using
t h is service, it
can be argued
t h at t h e findings
are rep resent at ive
Cop yrigh t
c 2002 Joh n
Wiley
&
Sons, Lt d.
Manage.
Decis. Econ. 23: 21-32
(2002)
DECISION T O F INANCE ACCOUNT RECEIVABLES 25
of t h e
indust ry's p ercep t ion
in t h e UK.
T h erefore,
t h e basic st at ist ical
ap p roach
is t o
rep ort
t h e
result s as
t h ey
were collect ed in t h e form of
p ercent ages
and
descrip t ive
st at ist ics. In
addit ion,
some anecdot al evidence is
p rovided. Alt h ough
t h e int erview-based
survey
of t h e
fact oring
in-
dust ry
was wide
ranging
in it s
coverage,
as
ment ioned above t h e main area of focus h ere is
on t h e det erminant s and crit eria t o ext end credit
by
t h e
fact oring comp any.
T h e
st udy
divides
fact oring comp anies
int o bank-owned and inde-
p endent ly
owned. F or reasons of
confident ialit y,
no reference is made t o t h e names of t h e
comp anies surveyed.
T ables
1
and 2
p rovide descrip t ive
st at ist ics of
t h e ch aract erist ics of t h e
ent erp rises
served
by
bank-owned and
indep endent ly
owned
fact oring
firms. T h e t ables
ident ify
t h e
demograp h ic
ch ar-
act erist ics of t h ese businesses based on t h e size of
t h e firm,
age,
t h e
t yp e
of indust ries
being
served
and also t h e
t yp e
of
ownersh ip .
T h e
fact oring
decision,
wh ich relat es t o
p rovid-
ing financing
t o firms t h at are
using
t h eir account s
receivables as
collat eral, migh t
also be influenced
by
t h e variables t h at are described in t h e correla-
t ion mat rix such as
size, indust ry, age, t yp e
of
cust omers,
financial
st at ement s, management ,
col-
lect abilit y
of invoices and credit not es. T h e
Pearson correlat ion t est is carried out t o examine
t h e relat ion bet ween t h ese different
p aramet ers,
t h eir effect on t h e
fact oring decision,
and also on
each ot h er.
T able 2 sh ows t h at t h e Pearson correlat ion
among
t h e different
p aramet ers
varies in
signifi-
cance. T h e correlat ion t ends t o fit wh at we found
in t h e
p ap er,
i.e. t h e decision t o offer t h e
fact oring
service is influenced
by
t h e size and
age
of t h e
client firm. T h e
h igh er
t h e level of t urnover of t h e
T able 1.
Descrip t ive
St at ist ics: Ch aract erist ics of
Ent erp rises
Served
by F act oring
F irms
(%)
Bank-owned fact ors
Indep endent
fact ors
Mean S.D.
(sig.)
Mean S.D.
(sig.)
Size of client firm
(emp loyees)
1-15
emp loyees
68.7 57.9
(0.03)
82.3 80.2
(0.05)
16-50
emp loyees 21.4 17.7
(0.00)
13.7 14.3
(0.00)
51-100
emp loyees
6.7 2.4
(0.00)
4.4 2.1
(0.00)
< 100
emp loyees
3.2 1.6
(0.00)
0.6 0.8
(0.65)
Size of client firm
(t urnover)
?25 000-?200 000 18.7 15.3
(0.01)
37.2 31.8
(0.00)
?200
000-?1
million 43.7 39.4
(0.00)
40.5 45.2
(0.00)
?1-?5
million 25.9 21.7
(0.00)
18.0 20.7
(0.06)
over ?5 million 11.7 14.8
(0.00)
4.3 2.7
(0.00)
Sect ors
Manufact uring
50.2 55.8
(0.00)
23 34.8
(0.01)
Dist ribut ion 30.3 26.8
(0.00)
34 42.1
(0.00)
Services 15.2 13.7
(0.00)
32.4 28.3
(0.00)
T ransp ort
3.2 2.4 (0.00)
9.2 8.8
(0.86)
Const ruct ion 1.1 3.7
(0.08)
1.2 2.1
(0.50)
Age
Less t h an 1 year
7 15
(0.14)
13 10.2
(0.00)
1-5
years
72 75
(0.00)
70.2 84.8
(0.00)
6-10
years
14 18
(0.00)
11.6 9.18
(0.00)
11-15
years
4.6 7.9
(0.00)
4.3 5.2
(0.00)
<15
years
2.6 5.8
(0.00)
0.8 0.6
(0.00)
Ownersh ip
PLC's 1.1 3.6
(0.003)
0.5 0.2
(0.73)
Lt d.
Comp anies
78.7 67.6
(0.000)
95.8 84.2
(0.000)
Sole
Prop riet ors 11.8 9.8
(.000)
2.4 1.5
(0.000)
Part nersh ip
8.4 6.3
(0.056)
1.7 0.6
(0.049)
Not e: T h e numbers in
p arent h eses
are t st at ist ics.
Cop yrigh t
C
2002 Joh n
Wiley
&
Sons,
Lt d.
Manage.
Decis.
Econ.
23: 21-32
(2002)
26
KHALED SOUF ANI
T able 2. Correlat ion Mat rix
Pearson correlat ion
coefficient
No. Variable 1 2 3 4 5 6 7 8 9
1
F act oring
decision 1.000
2 Size of client
(by t urnover)
-0.038*** 1.000
3
Indust ry (p roduct )
0.067* 0.034 1.000
4
Age
of client firm -0.073*** -0.101* -0.064 1.000
5 Cust omers
(t rade debt ors)
0.163*** 0.158 -0.036** -0.061 1.000
6 F inancial st at ement -0.053 0.217 -0.011 0.173 0.162 1.000
7
Management
0.022* 0.097 -0.006 0.042** -0.028 0.056 1.000
8
Collect abilit y
0.034*** -0.164 0.008 0.103 -0.059 0.075** 0.029 1.000
9 Credit not es 0.022** -0.006 -0.003 -0.237** -0.017 -0.179* -0.013* 0.108 1.000
Not e: T h e
*, **,
and *** indicat e t wo-t ailed
significance
at
10%, 5%,
and 1%, resp ect ively.
client firm t h e less
likely fact oring comp anies
will
offer t h eir financial service t o t h ese firms. T h is can
p ossibly
be due t o t h e
unwillingness
of
larger
client
firms t o
op t
for credit
management , collect ion, and
finance
t h rough fact oring comp anies,
and inst ead
op t
for an
int egrat ion
of t h is t ask
int ernally.
T h e
same
analogy
can be
ap p lied
t o t h e
age
of firms.
Older firms h ave a lesser
t endency
t o seek
fact oring
services because
t h ey
are more est ab-
lish ed in t h e market
p lace
t h an
younger firms;
t h is
is
ap p arent
in t h e
resp onse
of t h e
sup p liers
of t h e
fact oring
service. T h e
t yp e
of cust omers t h e client
firms h ave is
evident ly
a
very imp ort ant
det ermi-
nant in
p roviding
finance
by
t h e fact ors. T h e
h igh ly significant p osit ive
correlat ion
suggest s
t h at
bet t er t h e
qualit y
of
cust omers,
t h e more
willing
t h e
fact oring comp anies
are t o offer
financing.
T h is is
closely
relat ed t o t h e
collect abilit y
of t h e
account , wh ich sh ows t h at it is easier t o collect
cash for invoices from
good
cust omers. T h e
correlat ion bet ween
fact oring
firms and t h e
t yp e
of
management
of t h e client firm is
significant ,
also
t h e
quant it y
of credit not es issued is
significant ly
correlat ed t o t h e
fact oring
decision
(t h e analysis
of
t h is
relat ionsh ip
is
p resent ed
lat er in t h e
p ap er).
Wit h
regard
t o t h e correlat ion
among
t h e different
variables,
no inference will be made
given
t h at t h e
object ive
of t h e
p ap er
is
mainly
t o est ablish t h e
det erminant s on t h e
fact oring
decision.
WHAT INF LUENCES T HE F ACT ORING
DECISION?
T h e
p ot ent ial
benefit s for
ent erp rises
t o finance
by
fact oring may
be useful in t h at int erest ed
p art ies
can est ablish a
comp arat ive analysis
wit h t h e
crit eria used
by
ot h er financial inst it ut ions
sup p ly-
ing
credit such as banks. T h e execut ives of t h e
fact oring
firms were asked about t h e
imp ort ance
of six det erminant s of t h eir decision
making
p rocess including
size of t h e client firm in t erms
of number of
emp loyees,
annual t urnover, t yp e
of
p roduct sold, indust ry, sect or, and
age.
T h e
resp ondent s
were asked t o rank t h e
imp ort ance
of t h ese det erminant s on a Likert
scale of 1-5, wh ere number 1 = Not
Imp ort ant
at
all, wh ile 5
Very'
imp ort ant . However,
for
any
ot h er feat ures not ment ioned in t h e
quest ion
but
considered
imp ort ant (or not ) by
t h e fact or, t h e
resp ondent s
were also asked t o list and rank t h em.
T h e
analysis
was
consist ent ly
conduct ed t o draw a
dist inct ion bet ween t h e bank-owned and
indep en-
dent ly
owned fact ors.
T able 3 sh ows t h e feat ures t h at were considered
imp ort ant
in
influencing
t h e decision of
fact oring
comp anies
t o
sup p ly
credit .
On t h e Lickert scale of
1-5, a number of
common and diversified t h emes
emerged esp ecially
bet ween t h e bank-owned and
indep endent ly
owned
samp les.
T h e result s for bot h
segment s
were
analyzed
and t h e
general
market result s
(rep resent ed by
t h e
weigh t ed mean)
are
p resent ed
in column 3. It is
imp ort ant
t o not e t h at t h e
p ercent age
market mean and t h e
p ercent age
resp onse
of t h e
samp le
are
nat urally
skewed
t owards t h e
larger fact oring organizat ions
owned
by
t h e bank
(about 93%). T h erefore,
t h e market
result s are
ext remely
close t o t h e bank-owned
fact ors but not ident ical due t o t h e
marginal
influence
(about 7%).
T h e
group ing
exercise
enabling
one t o
comp are
t h e
indep endent ly
owned
fact ors wit h t h e bank-owned
fact ors,
is
imp ort ant
Cop yrigh t
( 2002 Joh n
Wiley
&
Sons,
Lt d.
Manage.
Decis.
Econ.
23: 21-32
(2002)
DECISION T O F INANCE ACCOUNT RECEIVABLES 27
T able 3. Paramet ers
Influencing
t h e
F act oring
Decision
Quest ion:
T o wh at ext ent do t h e
fbllowing.
fat ures influence
your
decision t o
offer your
services, and on a scale
of 1-5
h oiw
do
you
rat e t h eir
imp ort ance?
B.O. mean
I.O.
mean Difference in mean
F eat ures
Size of client
(emp loyees)
1.125 1.181 -0.05%
Client t urnover 4.3 2.272 47.1%***
Product 4.5 3.9 0.13%***
Indust ry
2.25 2.636 -0.38%**
Sect or 3.375 2.454 3.34%*
Age
of t h e client 4.2 2.727 35.1%**
Ot h ers
Cust omers
(debt ors)
4.5 4.72 0.04%***
F inancial st at ement 2.875 2.272 0.20%**
Management
4.25 3.54 0.16%***
Op erat ional suit abilit y
2 0.363 0.81%
Profit abilit y
1.625 0.272 0.83%
Collect ibilit y
4.875 4.545 0.06%***
Credit not es 4.625 4.636 0.002***
B.O.= rep resent s
bank-owned fact ors,
lO.= rep resent s indep endent ly
owned fac-
t ors.
Not e: T h e
*, **,
and *** indicat e t -st at ist ics
significance
at 10%, 5%, and 1%,
resp ect ively.
because t h e t h emes t h at
emerged
from int erviews
of smaller
organizat ions may
address t h e issues
relat ing
t o finance
gap s.
T h e
analysis p roceeded by
t aking
each result
rep resent ing
each individual
p aramet er
in t h e
quest ion,
and t h en
ident ifying
t h e
degree
of it s
imp ort ance
and associat ed
imp lica-
t ions.
Size: Number of
Emp loyees
T h e mean
resp onse
in t h e market for
using
t h e size
of t h e client firm
(in
t erms of t h e number of
emp loyees)
as a crit erion for decision
making
sh owed a low 1.13 result on t h e Lickert scale. T h is
indicat es t h at t h e number of
emp loyees
is not an
imp ort ant p aramet er
in t h e
fact oring
decision. T h e
findings
reflect ed t h e beh aviour of most of t h e
fact oring comp anies int erviewed,
wh ere bank-
owned fact ors exh ibit ed a
resp onse
of
1.125,
and
t h e
indep endent ly
owned fact ors 1.181 on t h e
scale.
T urnover
T h e t urnover of t h e client firm recorded a
h igh
mean of 4.2 on t h e
scale,
wh ich indicat es t h at a
firm's annual t urnover is an
imp ort ant
element in
t h e decision t o
sup p ly
credit
t h rough fact oring.
However,
t h e result
only rep resent ed
t h e bank-
owned
fact ors,
because t h e
indep endent ly
owned
fact ors sh owed a low mean of 2.272
signifying
low
emp h asis
on t h e
imp ort ance
of t urnover as an
influence on t h eir decisions. T h is
p oint sup p ort s
t h e result s of Soufani et al. (1999)
t h at a
subst ant ial concent rat ion of t h e
fact oring
business
of t h e
indep endent ly
owned is in t h e lower end of
t h e market . T h ere also
ap p ears
t o be direct
comp et it ion
bet ween
large
fact ors for client s in
t h e ?200
000-?1
million band.
T h erefore,
t h ere is a
t endency
for smaller fact ors t o exh ibit less
st ringency
on t h e level of t urnover wh en evaluat -
ing
a
p rosp ect ive
client . T h is result also
sup p ort s
t h e
findings
of Smit h and Sch nucker
(1994),
wh ich
relat e t o t h e t h eoret ical not ion t h at smaller firms
can not t ake
advant age
of economies of scale t o
int egrat e
and int ernalize t h e
p rocess
of credit
management by financing
account s receivable
t h rough fact oring.
Product
T h e
t yp e
of
p roduct sup p lied by
t h e client firm
recorded a
very h igh
mean of
4.49, indicat ing
t h at
fact oring
firms consider t h e
p roduct
a firm sells or
p roduces
t o be
very imp ort ant .
T h e execut ives in
t h e
indust ry argued
t h at t h e
great er
t h e
degree
of
sop h ist icat ion
of t h e
p roduct ,
t h e
bigger
t h e cause
for alarm.
Sop h ist icat ed p roduct s may require
Cop yrigh t (
2002 Joh n
Wiley
&
Sons,
Lt d.
Manage.
Decis. Econ.
23: 21-32
(2002)
28 KHALED SOUF ANI
sop h ist icat ed cust omers,
comp lex op erat ions,
and
p ossibly
t h e exist ence of different
st ages
of
p roduct ion,
and
p ayment s;
all of t h ese
may
rep resent p ot ent ials
for
disp ut e
and default . If
t h e
p roduct
was of t h is
nat ure,
fact oring organiza-
t ions indicat ed t h at in
many
cases
t h ey migh t
find
t h e
p rocess
unfact orable. As one
managing
direc-
t or st at ed:
...t h e
p roduct
of our client s is of concern t o
us...any p roduct
can define a
market ,
and
every
market h as
cust omers...if
t h e
p roduct
is sim-
p le...t h en
we can
accurat ely p redict
t h e beh a-
vior of all
p eop le
involved...but if t h e
p roduct
is
sop h ist icat ed
t h en we will h ave a h ard t ime
underst anding
it s
usage, t yp e
of client s and
cust omers...
T h e
resp onses
from all firms
regarding
t h is
p oint
were almost
ident ical, t h erefore, we can
ident ify
and est ablish a
st rong commonalit y
bet ween t h e
bank-owned fact ors wit h
4.5,
and t h e
indep en-
dent ly
owned fact ors wh ich h ad a mean
resp onse
of 3.9.
Indust ry
T h e
indust ry
feat ure did not score
h igh ly
on t h e
scale of
imp ort ance
as an influence on t h e decision
making p rocess.
T h e result s were uniform across
all cases bot h for
large
and small
fact ors,
wh ich
recorded 2.25 and
2.63,
resp ect ively, result ing
in a
weigh t ed
mean of 2.27. In t h e case of t h e
indep endent ly
owned
fact ors,
t h e result s were
skewed more t owards t h e neut ral area. T h e reason
for t h is
finding
can be at t ribut ed t o t h e fact t h at
many
of t h e
resp ondent s
could not
dist inguish
bet ween an
indust ry
and a sect or.
However,
t h e
majorit y p resent ed
a similar
argument :
if t h e
broad sect or was
ident ified,
and t h e
p roduct
analyzed,
t h en t h e need t o est ablish t h e
imp or-
t ance of an
indust ry
diminish ed.
Sect or
T h e
t yp e
of sect or sh owed a reasonable
degree
of
imp ort ance for t h e
fact oring
decision. T h e market
average
was 3.34
indicat ing
neut ral t o
imp ort ant ;
t h e
comp arat ive analysis
of t h e result s sh owed a
divergence bet ween t h e small and t h e
large
fact ors.
T h e
indep endent ly
owned
fact oring organizat ions
recorded a mean of 2.45, indicat ing
t h at t h e
t yp e
of sect or is less
imp ort ant
in
making
credit
decisions. T h is is consist ent wit h t h e result s
revealed in Soufani et al. (1999)
wh ich sh ow t h at
marginal
businesses were
mainly
cat ered t o
by
t h e
smaller
fact oring comp anies.
It
ap p ears
t h at a
large p ercent age
of t h e client firms are in t h e
dist ribut ion and service sect ors. Since t h e inde-
p endent ly
owned fact ors are
comp et ing
for a
smaller sh are of t h e
market ,
t h e decision
regarding
t h e
sup p ly
of t h e service
ap p ears
t h en t o be more
'relaxed' t h an t h at of
larger fact oring comp anies.
T h erefore,
it can be
argued
t h at smaller
fact oring
comp anies
can 'vent ure' int o more
risky
businesses
based in different sect ors and
selling
various
p roduct s p rovided
t h at addit ional crit eria are
met wit h
relat ively
more informat ion available.
Age
T h e
age
of t h e client firm in t h e market scored
h igh ly
on t h e scale. T h e market mean st ood at
4.1,
wh ich indicat ed a
h igh imp ort ance
feat ure. T h e
result s were more
imp ort ant
t o bank-owned
fact ors t h an t h e
indep endent ly
owned fact ors.
Smaller fact ors
ap p ear
t o h ave
relat ively
more
involvement wit h
very young
client firms
(13%
of
t h eir client
base).
T h is confirms t h e
p oint
made
earlier about
comp et it ion
and t h e
willingness
of
smaller fact ors t o finance
st art -up
firms
p rovided
t h at t h e
p roduct
was fact orable, and if ot h er
crit eria are met .
Age
was more
imp ort ant
t o bank-
owned fact ors
p ossibly
because of t h eir
abilit y
t o
obt ain more informat ion about risks.
Larger
fact oring comp anies
h ave access t o more informa-
t ion t h an smaller
ones,
and can t h erefore act and
react fast er t o
any ch anges
in t h e client 's condi-
t ions. One
managing
direct or of a
large fact oring
organizat ion
said:
...age
is an
imp ort ant
feat ure...a
good
number
of
comp anies
fail
in t h e first 2
years
of
op erat ion...if
we at t ach a number t o t h is from
our
p oint
of
view...it
is
25%...so
we can not
afford t o be relaxed or seen t o be flexible on t h e
age
of t h e
client ...
Anot h er
Managing
Direct or summarized t h e
view
fact oring comp anies
t ake of t urnover and
client
age:
..t h e
smaller and
younger
t h e client , t h e
h igh er
t h e
mort alit y rat e...
T h e result s h ere are consist ent wit h t h e observa-
t ion t h at a
very
small
p rop ort ion
of t h e bank-
Cop yrigh t Cc
2002 Joh n
Wiley
&
Sons,
Lt d.
Manage.
Decis. Econ. 23: 21-32
(2002)
DECISION T O F INANCE ACCOUNT RECEIVABLES 29
owned fact ors
t arget
t h e
less-t h an-i-year band,
and t h at a subst ant ial
p rop ort ion
of t h eir
p ort folio
is bet ween I and 5
years. T h erefore,
it can be
argued
t h at t h e
age
of t h e client firm is an
imp ort ant
crit erion in decision
making. Age
seems
t o be a
p roxy
for
collect ibilit y.
Ot h er feat ures
As ment ioned
above,
six
general
feat ures were
p resent ed
in t h e
quest ionnaire addressing
t h e
different element s t h at influence t h e decision
making p rocess.
In
addit ion,
t h e
resp ondent s
were
asked t o list
any
ot h er feat ures
t h ey
considered
imp ort ant
and are
normally
account ed for wh en
evaluat ing
a client . Different
resp ondent s
list ed
addit ional
p aramet ers
and at t ach ed a
varying
degree
of
imp ort ance
t o
each ;
t h is was not
confined t o t h e t wo
segment s
of t h e
market , but
t h e dist inct ions were even evident for individual
cases t h at
belonged
t o eit h er t h e bank-owned or
indep endent ly
owned
group s.
Cust omers
(debt ors)
One
general
feat ure t h at was considered t o be t h e
p rime
element in
considering
a
p ot ent ial
client was
t h e
t yp e
of cust omers and t h eir
qualit ies
in t erms
of debt commit ment . T h e fact or's ult imat e deal-
ings
were wit h t h e cust omers of t h e
client ;
it is t h e
cust omer t h at
buys
t h e
p roduct
or service from t h e
client ,
and it is t h e cust omer wh ich is
obliged
t o
resp ect
t h e t erms of t h e invoice. T h e
fact oring
service becomes
h elp ful during
t h e
p eriod
of t ime
wh en t h e client firm
exp erience
cash -flow
p roblems
(due
t o t erms of
credit ,
or lat e
p ayment ).
If t h e
cust omer does not make
t imely p ayment s,
or is
considered t o be of
h igh risk,
t h en t h e
fact oring
comp any
would h ave t o bear t h is risk if it was
offering
t h e full
fact oring
service. T h e debt or book
is t h e collat eral t h at t h e
organizat ion
h as in order
t o st ruct ure it s
financing
met h ods. T h e
h igh er
t h e
qualit y
of t h e debt or
book,
t h e less is t h e
uncert aint y
and t h e lower is t h e risk for bot h
t h e client firm (in t h e case of recourse
fact oring),
and t h e fact or
(non-recourse). T h erefore, t h e
client 's cust omers, as a feat ure for decision
making,
scored
very h igh ly
on t h e Likert scale
for bot h t h e bank-owned fact ors, and
indep en-
dent ly owned fact ors
sh owing
4.5 and 4.72,
resp ect ively.
T h e market
average st ood at 4.55.
Most firms int erviewed make a dist inct ion t h at
cust omers are looked
up on
from bot h a
general
and a
sp ecific p ersp ect ive.
T h e
general p ersp ect ive
is of t h e
qualit y
and ch aract erist ics of
cust omers,
wh ile t h e lat t er
mainly p ert ain
t o t h e number and
value of invoices of each firm.
...t h e cust omers of our client s form t h e base
wit h wh ich we build our financial
relat ionsh ip
on...if
t h ey
are of
good qualit y...like big
corp orat ions...t h e relat ionsh ip
would be suc-
cessful,...and
if t h e cust omers are weak...t h en
t h is would sh ake our commit ment ....
F inancial St at ement s
Anot h er
feat ure,
wh ich
consist ent ly ment ioned,
was t h e financial st at ement of t h e client
firm;
t h is
included
p ast
and
p roject ed
income
st at ement s,
and balance sh eet s. T h e it ems on t h e financial
st at ement t end t o
give
a
p rofile
of t h e financial
st anding
of t h e client in t erms of sales, cost s,
asset s, and
liabilit ies, and
consequent ly
t h eir cash
flow
p osit ion
and
working cap it al
needs.
However,
t h e
int erest ing finding
was t h at t h e
degree
of
imp ort ance
at t ach ed t o t h is
general
feat ure was
not
h igh
on t h e Likert scale for bot h t h e bank-
owned and
indep endent ly
owned fact ors wit h
means of 2.875 and
2.272, resp ect ively,
and h ence
a market
average
of 2.85. T h e
degree
of
imp or-
t ance t ended t owards solid neut ral t errit ories. A
p ossible exp lanat ion
for t h is observat ion is as
follows: financial st at ement s sh ow t h e amount of
cash
circulat ing
wit h in t h e st ruct ure of t h e busi-
ness,
eit h er as inflows or
out flows,
and so
p rovide
t h e means t o more
accurat ely
assess t h e firms
financial
requirement s. However, fact oring
firms
ap p ear
t o
ap p reciat e
t h e fact t h at businesses oft en
seek invoice
financing
t o bolst er weaknesses in
t h eir cash flow
p recisely
wh en t h eir financial
st at ement s indicat e
p roblems.
T h erefore,
it can
be
argued
t h at
alt h ough
financial st at ement s are
considered t o be an essent ial
requirement
for
evaluat ion
by
t h e
fact oring comp any,
t h eir overall
st rengt h s
or weaknesses are not considered an
imp ort ant crit erion in t h e decision t o
sup p ly
credit .
T h is
finding
h as a
very imp ort ant imp licat ion for
t h e
growt h
of small firms. Small firms ch aract er-
ist ically p ossess
weak financial
p osit ions, mainly
on t h e asset side of t h eir balance sh eet , t h eir
p ossible inabilit y
t o
gain financing t h rough normal
banking
ch annels due t o insufficient collat eral
cont ribut es t o t h e creat ion of a finance
gap .
Cop yrigh t
C 2002 Joh n
Wiley
&
Sons,
Lt d.
Manage.
Decis. Econ. 23: 21-32
(2002)
30
KHALED SOUF ANI
T h erefore,
t h eir
p ot ent ial
t o
grow
can be enh anced
by using
a
fact oring
service
p rovided
t h at t h e
viabilit y
of t h e
business,
p roduct
and cust omers
can be est ablish ed.
Management
Anot h er
imp ort ant general
feat ure t aken int o
considerat ion is t h e
management
t eam of t h e
client firm. T h is element exh ibit ed a
great er degree
of
imp ort ance
for
large
fact ors t h an for smaller
ones. T h e mean
resp onse
for t h e bank owned
fact ors were
4.25;
all cases at t ach ed an
imp ort ant
resp onse
t o t h is feat ure. In
evaluat ing
t h e
manage-
ment
t eam,
business t rack
record, abilit y
t o
adap t
t o market
ch anges
for t h eir
p roduct s, willingness
t o
adop t
new met h ods of
op erat ions
wh ich would
cont ribut e t o t h e success of t h e
business, and
int egrit y
of
p eop le
on bot h t h e
p ersonal
and
business levels were considered crucial. In
many
cases,
fact oring comp anies go
t o t h e ext ent of
request ing
business references and search for
any
legal judgement s p ert aining
t o t h e individuals. In
t h e words of one
managing
direct or:
...our
business is conduct ed wit h
p eop le...first
and foremost ...t h e
management
of
any
ent er-
p rise
is t h e
driving
force beh ind it s
success,...if
t h e
t op
t eam is
unreliable...t h en
you
are
assured of a
h igh
failure
rat e...but
if t h e
management
is
dynamic, efficient , mot ivat ed,
and
enjoys int egrit y,
and if we can est ablish
t h at ...t h en we are in business.
T h e
resp onse
of t h e
indep endent ly
owned
fact ors was more neut ral on t h is issue 3 on t h e
scale;
t h is
likely
st ems from t h eir desire t o
get
businesses,
wh ich in
many
cases are considered
marginal.
Op erat ional suit abilit y
One feat ure t h at was ment ioned as a decision
making
element is t h e
op erat ional suit abilit y
of t h e
p rosp ect ive account s;
t h at
is,
t h e likelih ood of
avoiding disp ut es bet ween t h e cust omers and t h e
client firm. If t h e cust omer records dissat isfact ion
wit h t h e
qualit y
of t h e
p roduct , invoicing, delivery,
service, or
any ot h er
asp ect of t h e
op erat ion of t h e
business, t h en t h ere is a
great er scop e
for
disp ut es
and conflict s t h us
affect ing p ayment s. T h is
asp ect
was recorded
by almost all t h e bank-owned fact ors
and was
h igh
on t h e list of feat ures. F or t h e
indep endent ly
owned
fact oring comp anies,
t h e
op erat ional suit abilit y
was
simp ly
a non-issue
due t o t h e fact t h at
t h ey
can infer t h e
suit abilit y
of t h e business from ot h er feat ures such as it s
p roduct ,
t urnover, cust omers, and credit not es.
Profit abilit y
Profit abilit y
is
generally
considered an indicat or of
business
p erformance. However, t h is is not t h e
case for
fact oring
decisions. As a crit erion, p rofit -
abilit y
was not
given
a
h igh
score on t h e Likert
scale. Almost all
resp ondent s
realized t h at busi-
nesses would not
st ay
in
op erat ion
if
t h ey
were not
p rofit able.
However,
in order t o reach a sat isfac-
t ory st age
of
p rofit abilit y,
a business sh ort -t erm
financial sit uat ion h as t o be
imp roved
t o ach ieve a
long-t erm growt h p ot ent ial. Secondly,
t h is indica-
t or
may
be seen t o be
misleading, mainly
because
many
businesses could
exaggerat e
t h eir cost s and
exp ense
levels for t ax
p urp oses.
As a result
many
fact oring comp anies
believe t h at a
large p rop or-
t ion of businesses would be reluct ant t o sh ow
h igh
p rofit s
t o avoid t h e
h igh er
t ax bracket s. As one
execut ive of a
large fact oring comp any argued:
...in a
large
number of cases t h e
figures
t h at we
see on t h e books
p ert aining
t o
p rofit
and loss
are
p robably
inaccurat e...but can somet imes
ident ify
some inconsist encies.. .we are int er-
est ed in
only
one book...t h at is t h e debt or
book...t h is h as t o look
good...
Collect ibilit y
Anot h er
imp ort ant
feat ure in t h e decision t o
ext end credit is
collect abilit y,
wh ich is t h e
abilit y
of t h e
fact oring
firm t o collect t h e full value of t h e
invoice from t h e cust omer. If invoices were not
collect able t h en
fact oring
as an
indust ry
would not
exist .
However,
t h e
frequency
of collect ion and t h e
abilit y
t o endure a
sp ecific p eriod
of t ime wit h out
receiving
cash
against
an invoice is crucial. T h ere-
fore, t h e
availabilit y
of sufficient
liquidit y
in t h e
fact oring indust ry is an
imp erat ive p re-requisit e
for it s
funct ioning and
fulfilling it s role. T h erefore,
fact oring organizat ions are regarded t o be t h e
most
sp ecialized ent it ies in
managing and cont rol-
ling
t h e rat ios of 'cash -out ' from 'cash -in' t o t h eir
business, and t h e businesses
t h ey serve. Cash -out s
rep resent
t h e advances or
p re-p ayment s
made t o
t h eir client s wh ile cash -ins
rep resent
t h e collect ion
Cop yrigh t
C 2002 Joh n
Wiley
&
Sons,
Lt d.
Manage.
Decis. Econ. 23: 21-32
(2002)
DECISION T O F INANCE ACCOUNT RECEIVABLES 31
of t h e invoice.
St riking
a
syst emat ic
and delicat e
balance bet ween h ow much t h e fact ors advance
and h ow much
t h ey
collect becomes t h e
p rimary
t ask. T h is
exp lains
t h e reason beh ind t h e
imp or-
t ance of
collect abilit 'y
as a feat ure for decision. T h e
market mean at t ach ed t o t h is feat ure was t h e
h igh est amongst
all t h e ot h ers
st anding
at 4.874.
Credit Not es
T h e
fact oring
decision
ap p ears
t o be
largely
influenced
by
t h e
availabilit y
of credit not es. T h ese
are inst rument s t h at allow t h eir h olders t o claim
financial
refunds, rep lace damaged it ems,
or it ems
t h at did not meet t h e
sp ecificat ions st ip ulat ed
in
t h e
p urch asing
cont ract and also
may
reflect t h e
amount of deduct ion from fut ure invoices. Credit
not es are also used wh en cust omers are
mist akenly
overch arged.
F or t h e
fact oring organizat ions,
t h is
feat ure was seen as
very imp ort ant
because it act s
as an indicat or for t h e
qualit y
of t h e
p roduct ,
t h e
level and
frequency
of
disp ut es,
t h e
efficiency
of
t h e
syst em
of
invoicing,
and also t h e client and
cust omer relat ions.
Many
fact ors
argued
t h at if t h e
credit not es account ed for over 10% of volume of
sales t h en t h e business is
quest ionable
even if it
sup p ort s
a
large qualit y
cust omer base.
Many
fact oring
execut ives
argued
t h is
p oint very
st rongly, including
one wh o st at ed:
...t o
us credit not es is a more
imp ort ant
indicat or t h an a cust omer...t h ese not es sh ow
if t h e client firm is
selling
t h e
righ t p roduct
in
t h e
market ,
if cust omers
ap p reciat e
it ,
if t h ere
are
p ot ent ials
for
disp ut es,...if
t h ere is an
efficient and
p rofessional syst em
of invoi-
cing...and
a wh ole
range
of ot h er
t h ings...
Anot h er execut ive
argued
t h e
imp ort ance
of
credit not es
by indicat ing
t h e need t o est ablish a
syst emat ic p rocedure
t o
qualify
and
quant ify
t h e
rep ercussions
of t h e exist ence of a cert ain level of
credit not e in
any
one business. He said:
..if
we h ad a
syst em
wh ere we can est ablish
wh y
cert ain businesses issue credit not es... and
ult imat ely
h ave a bench mark level for different
indust ries, sect ors, client s, cust omers, sea-
sons...et c. we can be in a
very good p osit ion
t o measure, and
manage risk....
T h e
resp onse of t h e market mean for t h e
imp ort ance of t h is feat ure was 4.63. T h e result s
T able 4.
Ranking
of F eat ures
Influencing Deci-
sions in t h e
F act oring
Market
Ranking
F eat ures
Collect ibilit y
of t h e account
2 Credit not es
3 Cust omers (qualit y of debt ors)
4 T yp e of p roduct offered in t h e market
5 Client t urnover
6
Age
of t h e client
7 Economic sect or
8
Management (qualit y
of
p eop le)
9 F inancial st at ement s
10
T yp e
of
indust ry
11
Op erat ional suit abilit y
12
Profit abilit y
of client firm
13 Size of t h e firm (no. of
emp loyees)
were almost ident ical for bot h t h e bank-owned
fact ors and t h e
indep endent ly
owned ones.
T h e
resp onse
rat es t o most of t h e different
feat ures used in t h e decision
making p rocess
were
about 90.4% of t h e
samp le
int erviewed. T h e
lowest
resp onse
rat e was for t h e
quest ion
of
p rofit abilit y (38.09% resp onded),
followed
by
op erat ional suit abilit y (42.8%).
T h e market mean
and t h e
p ercent age resp onse
of t h e
samp le
are
conducive t o
est ablish ing
a
ranking syst em
of t h e
imp ort ant
feat ures considered
by
t h e
fact oring
comp anies
bot h
large
and small in t h eir decision t o
offer t h eir services. T h e
ranking syst em
is based on
t h e element s t h at scored t h e
h igh est
on t h e Likert
scale and t h en work in a
descending
manner as
illust rat ed in T able 4.
CONCLUSION
T h e
p ap er
uses dat a from an int erview-based
survey
of t h e
fact oring indust ry
in t h e UK t o
sh ow t h e element s t h at influence t h e decision t o
sup p ly
finance
by fact oring comp anies.
T h ere are
many imp ort ant
observat ions
p ert aining
t o t h e
element s t h at are t aken int o account wh en decid-
ing
on
fact oring
account s receivable from t h e
sup p liers' p ersp ect ives.
It
ap p ears
t h at t h e decision
making p rocess
is influenced
by p aramet ers
such
as t h e size of t h e
ent erp rise
in t erms of t h e number
of
emp loyees
and t urnover,
t yp e
of
p roduct ,
indust ry,
sect or,
age, t yp e
of
cust omers, financial
st at ement ,
management
t eam,
op erat ional
suit -
Cop yrigh t (
2002 Joh n
Wiley
& Sons, Lt d.
Manage.
Decis. Econ.
23: 21-32
(2002)
32
KHALED SOUF ANI
abilit y, p rofit abilit y, collect abilit y,
and credit
not es. T h e most
imp ort ant emp irical findings
of
t h e
st udy
are t h at
fact oring comp anies ap p ear
t o
h ave different crit eria t o select t h eir client s or t o
offer t h eir financial services t o t h eir client t h an
ot h er
financial inst it ut ions. T h ese crit eria
may
differ
subst ant ially
from t h ose used
by
banks for
examp le.
Wh ile t h is
p ap er
does not est ablish a
comp arat ive analysis
bet ween
banking
inst it ut ions
and
fact oring comp anies,
it would be useful t o
p resent
some
p ossible
observat ions about t h e
crit eria used
by
t h e lat t er.
F act oring comp anies
st ress t h e
imp ort ance
of t h e
collect abilit y
of t h e
invoices,
wh ich is
st rongly
relat ed t o t h e
t yp e
of
cust omers,
credit
not es,
and
t yp e
of
p roduct .
F act oring comp anies
also consider t h e role of
management
and t h e economic sect or as essent ial
p aramet ers
t o
grant
credit . Anot h er
imp ort ant
finding
is t h at t h e result s from t h e
sup p ly
side of
t h e market corroborat e some of t h e
findings
observed on t h e demand side of t h e
fact oring
market as sh own
by p revious
st udies such as
Soufani
(2000b)
and Smit h and Sch nucker
(1994).
It can be
argued
t h at
ident ifying
t h e crit eria t h at
influence
credit
t h rough fact oring
and invoice
financing may h elp
est ablish a
comp arat ive analy-
sis wit h det erminant s used
by banking
inst it ut ions.
T h is can
p rovide
means of
evaluat ing
wh et h er or
not t h e
fact oring op t ion
h as t h e
p ot ent ial
t o
alleviat e credit
rat ioning
faced
by
small ent er-
p rises.
Some of t h e overall result s lend
sup p ort
t o
claims
by
some research ers t h at
fact oring comp a-
nies can
p rovide
a source of
financing
for
small,
young
firms
op erat ing
in
sp ecific
sect ors.
However,
it is crucial t o
recognize
t h at t h is
financing
service
is not
op en
t o all firms and
p art icularly
t h ose t h at
do not meet t h e decision crit eria t h at are ident ified
by
t h e
sup p liers
of t h e
fact oring
service.
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