Sergii Karasov1, legal adviser of the non-banking factoring company Faktoro, Lithuania, makes a thorough analysis of international factoring between Ukraine and Lithuania and its role to help Ukrainian SMEs to grow.
Exports of Ukrainian goods to EU countries including Lithuania in 2018 increased to US$20.153bn, which is a record indicator2. In addition, the volume of bilateral trade in goods in 2018 amounted to US$1.2bn. Ukrainian exports amounted to US$342.8m, imports to US$877.8m3. Such economic indicators suggest that factoring services for Ukrainian companies could be a supporting tool to increase productivity and export volume4 . Ukraine signed and acceded to UNIDROIT Convention on International Factoring (Ottawa, 28 May 1988)5. Analysis and research of the market for factoring services in Ukraine makes it possible to argue that Ukrainian factoring companies have limited access to international (cross-border) factoring financial services6. Providing international factoring services for Ukrainian business is a unique opportunity for foreign financial non-bank companies to support Ukraine as a strategic partner of the EU in increasing the export of goods, and Ukraine's small and medium-sized businesses can quickly receive funding in a simplified manner. At the same time, a significant proportion of entrepreneurs in Ukraine do not use such financial instruments. Among the most common causes of this problem are the lack of knowledge about the modern concept of international factoring and the prerequisites for pricing policy, the factual absence of a factoring market in Ukraine, the unwillingness to ‘get out of the shadows’ and make transparent business procedures, the lack of knowledge about the correspondence of currency control of banks with respect to company-residents by limited terms of payments for operations on export of goods and international factoring, and the lack of sufficient knowledge of banking institutions in the application of normative acts on bank currency supervision and international factoring. In a society, these forms dismay at the possibility of obtaining financing of international factoring for the development of SME businesses in Ukraine, and it remains problematic for contacts between Ukrainian businessmen and foreign financial non-bank companies7.
International factoring: challenges and solutions
Selling goods and services in the international market is a challenge for many companies. Different currency systems, legislation, and languages are all obstacles to international trade. One of the biggest problems is the growing persistence by importers that trade is carried out under an open account. This often means that the payment is received many weeks or even months after delivery. By offering buyers a bank credit in this way, there may be problems with the flow of cash for exporters. The situation may get worse if importers delay paying - or do not pay at all because of their own financial problems8.
International factoring provides a simple solution to these problems, regardless of whether the exporter is a small company or a large corporation. The role of a factoring company is to raise the money owned by exporters by addressing buyers in their country, in their native language and in a generally accepted manner, and at the same time pay the exporter 90-70% of the advance payment from the invoice amount. International factoring is seen as an excellent alternative to other forms of trading finance, and the traditional bill of credit is gradually replaced with open account trading financing services9.
The factual absence of a factoring market in Ukraine is explained by the reasons for not controlling the risks by factoring companies, the lack of access to cheap loans for financing factoring, massive non-payment of debts10, and low credit rating of Ukraine11. Moreover, companies called ‘factoring’ specialise in debt collection for all types of credit products of banks and financial institutions, as well as accounts receivable on services (utilities) and telecommunications companies12.
From the provider’s point of view, there are two types of factoring: 1) banking factoring, 2) factoring provided by non-bank financial companies. Factoring provided by non-bank financial companies is usually offered in the region to clients with an annual turnover of up to EUR 3,000,000, with a factoring limit of EUR 5,000 to EUR 300,000 per transaction, however, these requirements are not applicable to Ukrainian companies. For such companies, banks do not provide factoring services.
Moreover, for banking factoring, most often:
• a mortgage is required;
• property valuation and insurance;
• the factoring decision is based on the assessment of the creditworthiness of the exporting company as well.
In addition, factoring can be offered with recourse and without recourse.
To provide factoring services, it is necessary to conclude:
• a bilateral agreement with the factoring company and transfer the right to claim to a third-party (debtor), which protects the exporting company from unforeseen risks;
• a trilateral agreement between the exporter (UA supplier), the factoring company (LT) and the buyer (LT, EU) on the notification of the debtor about the transfer of the claim right and the choice of the law to be applied to the factoring agreement and the contract of sale.
Experience with Ukrainian and Baltic companies determine that:
• the procedure for concluding a factoring agreement and verification of the debtor's solvency, as a rule, takes up to five business days;
• after factoring agreement is concluded, payment on the invoices presented to be financed is carried out within 24 hours, after receipt from the buyer of the confirmation of the proper quality of the goods in accordance with the contract of sale.
• signature of contracts is made in electronic form.
1Sergii Karasov holds a Master's degree in law at the Yaroslav Mudyi National Law University (Ukraine, Kharkiv) and a Master of international law at the Mykolas Romeris University (Vilnius, Lithuania)
2,3Foreign trade of Ukraine goods in 2018, State Statistics Service of Ukraine
4according to the Embassy of Ukraine in the Republic of Lithuania
5 date of entry in force in Ukraine: 01.07.2007
6Estimation of financial opportunities of factoring companies of Ukraine (example is "Factoring Finance")
7European Instruments for the Development of Small and Medium Business in Ukraine, Public Synergy, 18.03.2019
8,9Facilitating Open Account - Receivables Finance, Growing market for international factoring
10Karakoi T.S, Legal regulation of factoring in Ukraine as a specific financial service № 4 (56), «Young Scientist», April, 2018
11Rating: Ukraine Credit Rating, 2018-12-21, Caa1 (Stable)
12 According to State Register of Financial Institutions there are 665 financial companies entitled to provide factoring services