Business in Malta is conducted in a rather traditional style, where the relationship between buyer and seller is very personal and much more focused on sales and the relation itself, rather than on collections or risk assessment. As is the case in other Southern European countries, effective payment terms are long and often with significant delays after the due date. The standard credit terms tend to be of around 60 to 90 days but many payments are effected between 90 to 120 days, and even more in certain industries such as tourism and hotels, or where some government departments are concerned.
Although the factoring product remains at an early stage of development in Malta, the results being achieved are quite remarkable. Since 2006, when factoring services were first introduced, volumes have been rising consistently. In 2011, the factoring industry in Malta continued growing rapidly, with global turnover increasing by 48 per cent on the previous year, reaching the €201 million mark.
The spike in factoring volume can be primarily attributed to businesses increasingly turning to factoring as an alternative to traditional bank loans. Factoring provides businesses in a wide cross-section of industries with immediate financing secured by credit-worthy account receivables.
Banks, on the other hand, typically prefer their lending to be based more on hard assets than on inventory and receivables. Local companies understand that when utilising a traditional banking instrument, be it a line of credit, overdraft account or a straight up loan, they would be incurring a liability that has to be paid back along with interest and fees. What they would effectively be doing is financing a free interest loan to their customers for the time between issuing the invoice and the receipt of payment. Moreover, these companies would also be assuming all of the risk should that loan not be paid on time or should the customer default.
The uptake of factoring solutions has also received a boost as a result of the presence of more multinational companies on the island. International companies tend to be more aware of factoring’s advantages and consequently adopt factoring as an alternative financial solution from the outset. They understand that factoring allows unlimited access to working capital, since the amount that can be borrowed through this financial instrument increases as sales increase.
Ultimately, the adoption of factoring in Malta as a mainstream financing option is down to awareness and confidence in the product. Factoring is covered by local legislation, and providers of factoring services must be registered as financial institutions, which are in turn regulated and supervised by the Malta Financial Services Authority.
The positive trend factoring is benefiting from is also likely to receive a further boost once businessmen realise that their own customers are also probably utilising some kind of factoring service when dealing with their vendors. As a matter of fact, factoring is a financing arrangement commonly used by many companies, starting with part or their top 20 per cent customers. As is frequently the case, as much as 80 per cent of a company’s business can come from 20 per cent of its customers, so these would could be the receivables most likely to be factored. However, factors can decide to finance up to 100 per cent of its creditworthy customer base if the business so chooses.
In Malta, recourse business is the norm, representing 89 per cent of total factoring business. However, where export business is concerned, the proportion of non-recourse factoring doubles to 22 per cent of the total. This reflects customers’ increasing attraction to the extensive advantages of factoring risk protection covers, together with those of international collection services.
Representing a little more than three per cent of GDP, factoring still has great prospects for growth in Malta. On the product side, one can see the potential development both in the domestic and the export markets of the supply chain finance/reverse factoring offer, following on the trend established in other European countries where factoring already represents more than 10 per cent of the GDP.
Truth be told, Maltese companies are still anxious when it comes to the introduction of a third party in their business relations. Encouragingly, however, as a result of increased awareness of the product, and through the efforts and expertise of the factoring market operators, together with the positive experience and its divulgation by the companies that already use factoring, substantial progress is being registered in overcoming these barriers.
Antonio Salgueiro is the Head of Mediterranean Factors at FIMBank plc. He has a combined experience of 25 years in factoring and financial services and is a specialist focused on developing receivables and supply chain structured trade finance solutions that help businesses to grow and flourish.
For more information about FIMBank and its comprehensive list of factoring services, visit www.fimbank.com