SUPPORTING BUSINESS

It would seem to be almost impossible for something new to surprise the Azerbaijani consumers of banking services who are spoilt for choice. Only a financially stable bank that is sure of tomorrow would risk bringing an innovation onto the market and be able to promote it and attract clients in current conditions. 

Factoring is the name of this new type of service being offered of late by one of Azerbaijan's major banks, PASHA Bank, to its customers who are engaged in small- and medium-sized business. Over a short period this product has managed to form a consumer base on the domestic market, which has encouraged the bank's managers to expand the area covered by this service.

But what is factoring? To be frank about it, until I talked to Aynura Piryeva, the chief manager of the business development department, and the project leader in charge of introducing this product at PASHA Bank, I myself only had a very superficial idea about this banking product. You see, up to now it is essentially practically unheard-of in Azerbaijan, a unique product, which has its own aims and structure, associated products and so forth.

So, we shall cite an example to make it clear what the essence of factoring is. Let's say that you are the owner of a small company offering services to clear up a site after construction work. You have a legally drawn up contract with the client, within the terms of which he is obliged to pay you within 15 days. But the payment is not made by the deadline, and the client asks you to wait for another couple of weeks. On the one hand, it is not to your advantage to spoil your relationship with a regular customer, but, on the other hand you need to pay your workers and buy new materials for another project. So, what can you do? Go to the bank for a loan, but that is a lengthy, expensive process which undermines the profitability of this project.

This is when the new product, factoring, comes to your aid. The bank, becoming an intermediary between two economic subjects, agrees to pay the sum you need for a small commission and wait some time (usually up to 180 days) until the client can pay off the debt. As a rule, the factoring company is prepared to pay up to 90 per cent of the sum owed immediately. The extent of the commission depends on the delay in receiving payment and the risk that the debt will not be repaid. This is a sufficiently convenient and easy service for all entrepreneurs, especially those engaged in small- and medium-sized businesses.

Your reputation at the bank

According to A. Piriyeva, the most important condition for gaining access to this product is for both companies to have a good reputation and an official contract between them. "We have staff at the bank who vet the companies beforehand and assess the possible risks. Only after that, can the factoring contract be concluded, the honouring of which is checked by the bank staff," the PASHA Bank representative noted.

There really are quite a few risks, and this is perhaps the main reason why not all the banks in Azerbaijan can permit themselves to introduce this product. You see, the question immediately arises as to what will happen if the client does not repay his debt. In that case, A. Piriyeva explains, the money borrowed by the contractor is converted into a bank loan. It is therefore the job of the banks expert staff to determine the maximum term for the factoring operation and the risk of non-payment. "But, as our practice shows, usually when the customer learns that the bank has become involved in the debt return process, especially if he is of good reputation, he himself takes an interest in honouring the terms of the contract. You see, his reputation at the bank is at stake; another time it will be much easier for him to approach the financial institution for funding or other financial operations," the expert noted.

The bank takes all the risks upon itself

In short, factoring boasts a whole series of advantages over other financial tools. For example, the loan does not need to be secured in the traditional sense. It is therefore accessible to a wide circle of small- and medium-sized companies, including those that have only just started operating. In this case, it is a win-win situation for almost all parties to the factoring, i.e. for the client-company that has received extra time to pay for the services received, and the contractor who can receive working capital in good time, and the "factor" itself, namely the bank.

At the same time, as already mentioned above, depending on what happens when the purchaser of goods or services does not pay, two forms of factoring can be distinguished, factoring with or without regression... Thus, if the bank's client wishes to take upon himself all the risks of non-payment, then in that case, he should choose a factoring product without regression". PASHA provides this service. In this case, the factoring organisation buys out the right to demand the debt from the contractor and takes upon itself all the risks, including the risk that the client will not pay up.

FOR YOUR INFORMATION 

In the countries of Western Europe the factoring turnover does on average amount to more than 5 per cent of GDP (in Great Britain and Italy - 10 per cent), in Eastern Europe - 1.5-2 per cent, in Russia - less than 0.1 per cent. Europe accounts for approximately 67 per cent of factoring turnover, America for 22 per cent, the Asian countries for 11 per cent and Africa for 1 per cent. Roughly 1,000 companies are engaged in factoring worldwide, and the volume of indebtedness transferred to them is 1 trillion euros.

A promising trend in services

When there are mutual relations with the purchaser, the factoring is open factoring, when the client is informed of the concessions in the demands made on him, and closed factoring when he knows nothing about it. 

The benefits of the service as well as the impeccable reputation of PASHA Bank have already allowed it to attract clients in a short period (the product was introduced in January this year). Besides this, today the bank is working on a new project to develop the service - the introduction of export factoring, in which the supplier (customer), his client and the bank conducting the factoring operations are in different countries. As a rule, the exporter concludes a global session contract with the bank, in which an undertaking is given to pass on to him the debit indebtedness of a certain circle of purchasers (for example, all the buyers in a certain country). In Azerbaijan there are sufficient companies that have business ties with foreign partners, in particular in Turkey, Georgia, Russia and so forth. Therefore, we have set about working on a big project in this direction," A. Piriyeva noted.

In short, in spite of the fact that factoring is quite "new" in Azerbaijan, it has already managed to gain recognition and respect, and has also become a sufficiently promising trend for the country's banking sector.

FOR YOUR INFORMATION

In the countries of Western Europe the factoring turnover does on average amount to more than 5 per cent of GDP (in Great Britain and Italy - 10 per cent), in Eastern Europe - 1.5-2 per cent, in Russia - less than 0.1 per cent. Europe accounts for approximately 67 per cent of factoring turnover, America for 22 per cent, the Asian countries for 11 per cent and Africa for 1 per cent. Roughly 1,000 companies are engaged in factoring worldwide, and the volume of indebtedness transferred to them is 1 trillion euros.