The year 2020 saw an all-time record for the biggest fall in factoring volume ever of 27.5 per cent, and a 22 per cent drop in factoring funds in use that was spread evenly across the factoring industry, said Carlos Baudrand Saavedra, CEO, Latam Trade Capital, Chile in the new edition of World Factoring Yearbook.
The good news is that the industry proved that it was able to move into a fully online service. There were no days of operational disruption once the country moved into full quarantine, and as we continue to constantly move in and out of quarantine, it seems that this will be the new normal for client/company operations.
To fully understand what has happened in the market, it needs to be said that the combination of social unrest - which began in 2019 - and the COVID-19 crisis created very special circumstances in 2020, both for the country and also for this industry. Some of the reasons behind the industry’s downward trend can be found in the macroeconomic environment.
The social protests at the end of 2019 and the COVID-19 pandemic exposed long-standing vulnerabilities in the Chilean economy and society: a high level of inequality and a high number of small and mid-size companies with weak productivity.
The huge impact of social unrest and COVID-19 triggered an agenda of structural reforms. This included higher pensions for the most vulnerable, a minimum guaranteed income, a new health plan, and the creation of a new tax bracket for high income taxpayers, addressing in part some of the inequality issues. In October 2020, a referendum approved a new elected constitutional assembly to rewrite the constitution, which could lead to more structural reforms. The COVID-19 crisis could add to this renewed appetite for discussing further structural reforms.
A period of political instability due to several elections and the discussion of a new constitution will affect the speed at which the Chilean economy will recover. However, a new social agreement approved democratically was necessary, and I am confident this will be the first stone in the construction of a better country and a fairer country.
Factoring Industry Environment
Factoring has reinforced its importance as the best and preferred provider of working capital for small and medium-sized companies. With that in mind, several government initiatives to support factoring companies offering competitive factoring rates have been discussed and are on their way to being implement. Nevertheless, private funders via special funds have been investing in alternative assets during the past few years, and these funds have become one of the most important funding sources for several factoring companies.
As mentioned earlier the industry had a huge drop in volume and funds in use during 2020, all as consequence of the major lockdowns due to quarantines to control the spread of COVID-19. At the end of the year the industry showed a drop of 22.4 per cent for funds in use, which was an improvement on the 27 per cent decline during the mid-point of the crisis.
The number of companies entering bankruptcy increased slightly by 4 per cent in 2020, but the name, size and importance of companies filling for restructuring purposes last year changed the financial criteria by which to assess risk. The industry probably faced the riskiest year in a long time.
The number of businesses operating in Chile still amounts to roughly one million companies, 78 per cent of which are micro businesses, 20 per cent are SMEs and 2 per cent are large companies: that is, companies with a minimum annual turnover exceeding USD four million.
The 30-day Payment Law, promulgated in January 2019, which puts a payment term cap of 30 days for both the private and public sector, and which came into force earlier than planned in April 2020 rather than January 2021, did not work as expected by the government. We assume that we will have to wait until the end of the pandemic and to normalise the economy before we see how this law eventually works out.
High liquidity in the economy and government financial assistance helped companies to maintain healthy payment behavior, and DSO (days sales outstanding) at 50-55 days.
To read the whole article and much more, order World Factoring Yearbook 2021 here.