Implications of the economic crisis of 2020 for the factoring market
As recognized by México’s President, Andrés Manuel López Obrador, the country will have to face an inevitable economic crisis that will take place this year due, mainly, to the Covid-19, as well as the collapse in the price of oil, the stock market crash, among other factors. This crisis, like any other, generates uncertainty about the consequences it will have on credit negotiations, including factoring operations.
Factoring is a way to obtain financing; it allows the transformation of illiquid assets into resources with immediate availability by transferring credit rights of accounts receivable. At the same time, it is beneficial for corporations, since this type of operation reflect credit health because it is not expressed as a liability in the financial statements of the company that opts for this type of financing scheme. In this sense, factoring has two options: a) the “recourse factoring, and b) non- recourse factoring. Unlike non-recourse factoring, resource factoring guarantees, in benefit of the factor, the joint responsibility of the factored party in the payment of the credit right. This represents a lower risk and, therefore, is generally preferred to non-recourse factoring.
Because of the nature of the transaction, factoring implies uncertainty of payment, and in an economic crisis, uncertainty tends to increase. The nature of the receivables being conveyed in a factoring transaction makes it possible to identify, to some extent, what might be expected in respect of one or other factoring transaction, precisely depending on the nature of the receivables. The uncertainty factor is compounded by the increase of risk of non-payment generated by an economic crisis.
Likewise, those institutions that resort to factoring, not to obtain liquidity, but to obtain a profit from the transaction, measure the risk of non-payment and reflect it in the decrease of the price they are willing to pay for the credit rights, so if the risk increases, the cost assumed by those who seek to finance themselves through the advance payment of their portfolio will increase. However, it is possible that the credit rights include, for the same reason, a very high interest, so that, if they are successfully collected, there would be a high profit for those who obtained the credit rights through factoring. The question is, in a crisis scenario, how sustainable will the collection of receivables be, and furthermore, what will be the cost of the lack of investors’ confidence in the payment of their receivables, it is also prudent to question whether high profitability will be able to overcome such risks.
As it is reasonable, the quality of the credit rights is directly proportional to the credit rating of those who issue them, and this rating is a factor that will naturally be important to take into account, and it is also likely to undergo certain changes during this year in which a financial crisis will take place.
As for the international market, it has been decided to make monetary policy more flexible. For the time being, in the United States, the Federal Reserve (Fed) resorted to a rate reduction to stimulate economic growth, as did the European Central Bank, the People’s Bank of China and the Bank of England, among others, including the Mexico’s Central Bank (Banco de México). However, border closures and mandatory quarantine in some countries will be a determining factor in the precariousness of the world economy.
In sum, it is true that investors will choose to carry out factoring operations, in part, depending on traditional factors, such as the nature of the receivable, the rating of those who issue them, etc., but it is also true that this new crisis has affected and will continue to affect financial markets, increasing risk and its corresponding aversion, so it is highly likely that factoring operations will be part of the collateral damage, coupled with the increased cost that will be assumed by those who seek to finance themselves through these means.