A Service of
Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics
Kozarevic, Emira; Hodzic, Mirela
Article Influence of Financing by Factoring on Company's Liquidity in Bosnia and Herzegovina
Economic Review: Journal of Economics and Business
Provided in Cooperation with: Faculty of Economics, University of Tuzla
Suggested Citation: Kozarevic, Emira; Hodzic, Mirela (2016) : Influence of Financing by Factoring on Company's Liquidity in Bosnia and Herzegovina, Economic Review: Journal of Economics and Business, ISSN 1512-8962, University of Tuzla, Faculty of Economics, Tuzla, Vol. 14, Iss. 2, pp. 18-32
This Version is available at: http://hdl.handle.net/10419/193861
Standard-Nutzungsbedingungen: Terms of use:
Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes.
Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu . Economic Review – Journal of Economics and Busines, Vol. XIV, Issue 2, November 2016 ///
INFLUENCE OF FINANCING BY FACTORING ON COMPANY’S LIQUIDITY IN BOSNIA AND HERZEGOVINA
Emira Kozarević*, Mirela Hodžić**
ABSTRACT in the system. One of the ways that might be used in solving illiquidity problems is The economic crisis, which did not leave Bosnia factoring. Factoring is a set of practical and and Herzegovina (BiH) unaffected, and the useful financial services which a company increasingly present problems with the may use to ensure against weak/poor collection of accounts receivable made the accounts receivable. It is particularly companies in BiH turn to factoring, a modern important to mention that factoring has financial tool that provides liquidity. Very become the topic of research for many authors frequently, slow collection of claims may be a in the field of finance due to its interesting problem, especially for small and medium-sized effects on enterprises. The most interesting enterprises that have difficulties in accessing one is the improvement of liquidity and short-term loans and in providing collateral for provision of funds not for its own credit loans and often face the problems of financing liquidity but for credit liquidity of the buyer as liquid capital. Due to all this, factoring is a well as for competitiveness on the market due high-quality instrument for “extinguishing” to granting more favorable credit terms to the illiquidity as by cession of claims the company buyers. Factoring enables faster circulation of obtains cash in a very short period. This paper resources and the liquidity of real economy. aims to establish the importance of factoring as Liquidity can be defined as financial solvency a modern financing tool in keeping liquidity, of the company, it can be expressed as the competitiveness, and export capacities of small liquidity of asset as well as corporate liquidity and medium-sized enterprises in BiH and to or solvency (Ivanovic, 1997, 125). On stock indicate advantages and disadvantages of market, liquidity can be measured by factoring as a modern form of financing observing the gap between the buying and compared to traditional financing forms. selling price (Bogdan, Baresa and Ivanovic, Financing by factoring is directly related to the 2010, 45). Other authors (Uyemura, Van subjects in factoring activities, factoring item Deventer, etc.) define liquidity as ability to as well as to the costs, elements, and risks of collect funds at no extra costs within a factoring. It is therefore very important to reasonable time (Kallberg and Parkinson, accentuate the differences between financing 1993, 234). The importance of maintaining by factoring and by short-term loans. liquidity and solvency in the economic crisis is Keywords: small/medium-sized company, reflected in the fact that every financial crisis short-term business financing begins at the time of termination of payment JEL Classification: G23, G39 obligations (Zelenika and Srdoc, 2011, 173). The circulation of resources may be speeded INTRODUCTION up primarily by the introduction of factoring as a new form of financing. However, the The collection of accounts receivable has been factoring market in BiH is not developed and a constant problem faced by companies in the the competition between the factoring last few years. It is even more difficult institutions is rather small. This basically nowadays due to increased general illiquidity means that factoring in BiH is at its beginning
* Associate Professor Faculty of Economics, University of Tuzla Univerzitetska 8, 75000 Tuzla, BiH ** Financial Manager, Neodent doo, Branislava Nusica 5A, 75000, Tuzla, BiH
/// 18 Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016 . Influence of financing by factoring on company’s liquidity in Bosnia and Herzegovina /// but with the potential of bringing significant subsidiary or classic institution of factor, benefits to the business community in BiH and factoring company, factoring-factor-house. to better business environment. If the banks For example, all larger banks in Croatia offer in BiH were able to provide appropriate credit factoring service (Pesic, 2011, 432). lines for the private sector, including short- The factors purchase short-term accounts term credit lines, the need for factoring would receivable with a certain maturity, the factor probably be small. Factoring as a form of pays to client for example 70-90% of the financing an enterprise is an alternative to the invoice value, less the factoring fee. The traditional sources of financing such as loans. remaining unpaid amount of the invoice is Besides, factoring companies all over the paid after the borrower solved the obligations, world offer various types and forms of minus a certain percentage of fees (for factoring as well as various factoring services services, credit risk, and interest from the (financing, accounts receivable book-keeping, moment of repurchase until the time of collecting payments, noticing debtors, etc.). charging the receivables). Usual deadlines of When a company selects the form of financing, short-term financing through factoring in whether it needs to decide between factoring business practice are between 30 and 120 and any other source of financing or between days, depending on the quality of receivables. several different types of factoring, it needs to It is also possible to repurchase maturities of look at all the advantages and disadvantages 180 days or more. The size of commission and offered by a specific option. However, the amount that will be paid immediately to advantages and disadvantages are not the clients depend on the accounts receivable, its only things the enterprise needs to take care quality, business reputation of the debtor, etc. of as the availability of certain sources of Except payment of accounts receivable, the financing on the specific market is equally factor can charge receivables, credit control, important. and administrative tasks of monitoring invoices for client, provide protection against 1. THEORETICAL FRAMEWORK OF the risk of non-payment and monitor the FACTORING solvency and credit worthiness of business Today, factoring is a significant form of partners. For risk overtaking, factor receives a financing, of both large corporations and small fee from vendor receivables ,which is and medium-sized enterprises, based on generally a percentage of the value of buying the seller’s accounts receivable on the receivables. However, the factors usually basis of goods sold to the buyer. The essence check the recoverability of accounts of factoring is the payment of client’s accounts receivable before it is accepted (Mishkin and receivable from a third party, collection of Eakins, 2005, 556). such accounts receivable from a third party Factoring transaction usually includes three and other related services in commercial and parties: the buyer of goods, the seller of goods, finance trade for a fee (Trifkovic and and the factor, except in the cases of Omanovic, 2001, 359). Factoring is “an international factoring which include the example of a technology that is particularly buyer, the seller and the import or export promising in the absence of developed factors. Hence, there are two basic types of institutions, as it relies on them to a lesser factoring domestic and international. extent” (Beck and Demirguc-Kunt, 2006, 1 2942). Domestic factoring includes three parties: Company can take advantage of its short-term 1. The factor is typically represented by a accounts receivable to sell them to the factor. factoring company, although this The factor can be the specialized financial function may be performed by banks’ institution or company or a bank which has a special organizational sectors, when separate department, or specialized factoring allowed by the jurisdiction. The contemporary factor, apart from buying
Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016 19 /// /// . Kozarević E., Hodžić M.
up the actual accounts receivable from 2. The second party in factoring is the the client, performs two additional client. The clients is obliged to functions – it grants the client a cede/transfer its accounts receivable to contractor loan to be used for planning the factor based on the concluded and contracting the credit sale of its contract but also to regularly deliver the goods with buyers and it services other factor the copies of invoices and companies’ securities and overdue receipts on the delivered goods. The securities as well as their collection client is also obliged to make the through the institutions of the system. invoices so as they be fully detailed in The factor charges the commission for terms of the data relevant for the buyer its services in the range of 2-4% above – the amount to be paid, terms and the inter-bank prime rate. This dynamics of payment as well as the provision covers the risk of collection to clear note that the payments is to be which the factor was exposed as well as made through the factor. the interest rate for credit financing the 3. The third party of factoring is the buyer client from the moment of buying up whose main responsibility is to pay for accounts receivable to the payment. the purchased goods in accordance to While providing complete factoring the sales contract concluded with the services, the factor may have other costs seller (the client). The buyer is (for example interest rates on unpaid primarily interested in the terms of accounts receivable over the fixed days payment (possibilities for credit or various commissions – for the pre- financing) rather than if the client (the contract activities, preparation of loan, seller) or the factor provides the loan. assessment of interest rates, etc). The When the buyer settles the accounts, factor settles and defines these specific financing by the factoring model is costs by the factoring contract. closed.
Factor
8) 3) 2) 4) 6) 7) 9)
5) Seller of goods Buyer of goods (client) 1) (client)
Figure 1. Clients in domestic and international factoring Source: http://www.cbbh.ba/press/edukacija/676, Accessed: 13/04/2014
/// 20 Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016 . Influence of financing by factoring on company’s liquidity in Bosnia and Herzegovina ///
3) Domestic factor Foreign factor
(export factor) (import factor)
2) 5) 7) 4) 6)
Seller of goods – Buyer of goods – 1) exporter (client) importer (debtor)
Figure 2. Clients in international factoring Source: http://www.cbbh.ba/press/edukacija/676, Accessed: 13/04/2014
International factoring business, apart from In general, banks grant short-term loans the abovementioned three parties (the factor, based on company’s ability to pay it, as the client, and the buyer) includes the fourth specified by cash flow and collateral. A party, the import or export factor, as company needs to satisfy bank’s criteria:2 explained in detail in Figures 1 and 2. Stable and strong company (3-5 years The factor buys the accounts receivable for a minimum); fee before the expiry date of payment, takes over the activities of collection, warnings, Positive cash flow (2-3 years minimum); account transactions, and the risk of collection Good financial results in the past; of receivables (Markovic, 2000, 58). At a time when it charges more than the discounted Collateral at least equal to the amount of price which he paid for the purchased loan (usually fixed assets not subject to receivables, the factor profits (Ivanovic, 1997, other rights of retention, sometimes 261). personal assets); When a company faces the financing problem, Good, clean credit history. it can use various alternatives to solve it. One The criteria may also include:3 of the alternatives is credit financing and another (available to shareholding companies Long process of loan application and only) is the security issue, while one of the payment; specific forms for overcoming the financing Extensive accompanying documents; problems is factoring. A company may contact the factoring institution and offer its accounts Fixed amount of loan and maturity date; receivable, still not due in exchange for cash. Re-application for additional resources After analyzing buyer’s credit worthiness, the (additional collateral); factoring company makes the decision on whether to enter a factoring business deal Bank as a sole provider of financial services with a company – a client, or not. to a company.
Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016 21 /// /// . Kozarević E., Hodžić M.
Table 1. Comparison of traditional short-term credits and factoring Short-term banking credits Factoring Dependence on collateral in the form Short-term accounts receivable serve of immovable property as collateral Supported by financial reports Not dependent on financial reports Guarantee contract with definite time Factoring contract line for payment Only short-term property is relevant Little significance of short-term in providing the credit service property as the support to credit Very flexible with the entire credit service line set as revolving Fixed amount of credit that may not Provides additional services with satisfy the business needs credit financing No additional services provided Revolving credit Credit payment may be challenged Provides the option for “controlling” Little involvement of the bank from credit activities. Demands active the moment of granting the credit to supervision of the program. the payment Higher cost price due to additional services provided Source: Rovcanin, Omerbegovic and Halilbasic, 2005, 17
The biggest problem with the banking Factoring credit line increases parallel with financing lies in the fact that once a company the company (factoring “loan” is not reaches its maximum credit limit it has very limited); little maneuvering space with slow cash flow Start-up companies are acceptable (strong and without additional collateral. The factors business relations needed); usually make their decision on providing cash Simple and short procedures for changes to a company on the basis of clients’ credit or expansion of credit terms; worthiness and the amount of accounts Provision of non-financial services receivables. This way, the factor may provide including accounts receivable book- financing even if a company is new or with keeping, collecting debts/accounts poor credit history or slow cash flow. The receivable and protection against credit factor is more flexible than the bank when risk (default obligations). considering increased sale as every account is assessed individually. 2. FACTORING ON GLOBAL LEVEL (OR General characteristics of factoring include:4 HOW DOES THE IMPACT OF FACTORING DIFFER BY COUNTRY?) Granting based on the quality of company’s clients rather than the company alone; Factoring is used in both developed and Short application process; developing countries. In 2004, the total Short granting process; worldwide factoring volume was over USD Cash within up to 48 hours; 860 billion, an impressive growth rate of 88% Accounts receivable used as collateral, since 1998 (Klapper, 2006, 3112). leaving fixed assets free for banking credit Bakker, Klapper and Udell (2004, 14) insurance; analyzed the volume of factoring by country and region from 1998-2003. The top three
/// 22 Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016 . Influence of financing by factoring on company’s liquidity in Bosnia and Herzegovina /// countries in 2003 were the United Kingdom determination of a factoring contract (Brkic, (EUR 160 billion), Italy (EUR 132 billion), and 2011, 177). the United States (EUR 86 billion). Growth in On international plan, up to the rendering of factoring was strongest in Australasia and the UNIDROIT Convention (Institute for the Europe but evident in all regions. Not Unification of Private Law), factoring surprisingly, growth in factoring was operation was organized only according to the extraordinarily strong in Eastern Europe (the rules of the common law and autonomous EU 8 plus Romania growing by 434% in trading law. After the conducted procedure of aggregate, though from a very small base. international unification which was carried Factoring has nowadays become an essential out under UNIDROIT, in1988 in Ottawa a model of financing of turnover. The data of the Convention on international factoring was International Factors Group Belgium (IFG) rendered. Convention came into force in 1995, indicate that in 2013 the scope of factoring defining the contract on factoring as the businesses in the world amounted to EUR contract on the basis of which the deliverer is 2,181,403 million with 4.49% share compared obliged to transfer on the factor the existing to the total GDP (International Factors Group, or the future claims from the contract on the Global Industry Activity Report, 2013). sale of goods (service) rendering between the European markets use the benefits of deliverer and his buyer, i.e. the user of the factoring to a significant extent and in 2014 services (Spasic, Bejatovic and Dukic- the following results were achieved Mijatovic, 2012, 200). (exemplified by the countries with the most It is obvious that the factoring business is yet developed factoring programs and the to take hold in the region which includes BiH. neighboring countries). The institutional framework has mainly been Also, it is a fact that European market is prepared and, upon its establishment through becoming more and more agile regarding the channels of official institutions, it may trade finance services used by the serve as a firm ground for the creation of new small/medium-sized companies (SMEs) financial institutions that might introduce operating in Europe. However, only a small trade in accounts receivables into practice. percentage of SMEs in Europe actually use factoring and invoice discounting in order to 3. POTENTIALS FOR DEVELOPMENT OF alleviate their cash-flow difficulties (Guiliano FACTORING IN BIH AND THE et al., 2009, 77). NEIGHBORING COUNTRIES
Table 2. Factoring business in the EU in 2014 (in Economic feasibility of factoring introduction EUR million) to the territory of BiH is based on the Volume of % Market objective estimates included in the scope of State factoring GDP share trade and business terms in the observed businesses region. The analyzed territory is limited to BiH UK 350,622 15.81 25.52 and the neighboring countries. Traditional France 226,598 10.58 16.49 economic, cultural and social contacts Germany 189,880 6.54 13.82 determine important trade relations that Italy 183,004 11.32 13.32 serve as the basis for the definition of a Croatia 2,498 5.80 0.18 possible scope of factoring use. The limitation Slovenia 536 1.44 0.04 of the observed region was made so as to The EU 1,373,774 9.87 100.00 avoid linking efficiency and the possibility for Source: Ristic and Ricka, 2015, 67 factoring use with the existence of the traditional trade relations. However, in legal theory and laws of some countries there is no unified stance in view of All the countries of the region and in the terminological, conceptual, and legal immediate surroundings of BiH (Serbia, Croatia, and Montenegro), face significant
Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016 23 /// /// . Kozarević E., Hodžić M. problems of liquidity, GDP stagnation, public public sector 58 days, the business sector 47 finance illiquidity, and slow jurisdiction. The days, and the consumer sector 34 days European payment index 2014 indicates the (Intrum justitia, European payment index, average late payment for 2014 as follows: the 2014, 8).
Table 3. Average term of contracted payment and late payment (in days) Public sector Business sector Customer sector
Country Average contracted Average contracted Average contracted payment/average payment/average payment/average late payment late payment late payment Serbia 20 12 24 16 26 20 Croatia 30 20 30 24 30 32 BiH 15 15 20 15 20 21 Source: Intrum justitia, European payment index, 2014, 155 Note: The data on Montenegro not available
The data for all three sectors in the observed developed business networks in the region, countries indicate that there is a significant which serves as the solid ground for the deviation in the average payment terms, development of factor network on the which makes manufacture in the business regional markets through their daughter sector particularly difficult. The extension of companies. The law status sets banks as a payment terms, which almost doubles the possible format for the very inception of this contracted days of payment, limits type of business as laws on banks do not reproduction, reduces turnover coefficient, stipulate any obstacles to factoring business. and, through capital price, significantly The problem is in the risky business reduces profit effect of business. However, the philosophy – banks are oriented towards positive fact is that the observed countries credit users while factoring companies turn to made factoring laws, which are in the stage of both credit users and their clients. As the creation on the same basis and will not founders of factoring companies, banks have constitute an obstacle for both domestic and certain limitations. Law on banks limit banks’ foreign factoring (Istuk and Labus, 2015). In investment into other companies, including the Federation of BiH the factoring law was factoring companies, but the limitation refers finally adopted on February 24, 2016.6 This is to the equity capital, while the scope of the first law of this kind not only in the factoring company in not subject to Federation but in BiH too. limitations as in that way, when compared to banks, placement concentration can be limited The third factor important for the (Ristic and Ricka, 2015, 69). introduction of factoring on the market of the region lies in the existing structure of the Traditionally over-liquid banks on the financial system. The financial systems of the territory of BiH with the bank centric system observed countries are characterized as in which practically all transactions are made “highly bank-centered, meaning that bank through the banks will be able to replace loans are the primary source of financing credit financing by buying up the assets or companies” (Miletic and Buljan Barbaca, 2015, accounts receivable for the contracted and 743). On average, above 80% of the financial executed business activities. As the banks systems of these countries are made of banks’ “live” with their clients, this will facilitate the financial potentials. In addition, the regional assessment of clients’ solvency and their market includes the banking systems that businesses worthiness. On December 31, 2014, the banks in BiH had BAM 6.1 billion of
/// 24 Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016
. Influence of financing by factoring on company’s liquidity in Bosnia and Herzegovina ///
Company structure by main sectors the liquid assets as, due to the unfavorable 10,00% 3,33% market situation, solvent clients are difficult 10,00% to find (The Central Bank of BiH, Statistics). 26,67% 16,67% 4. RESEARCH METHODOLOGY 33,33% The empirical part of the research included the data collection by means of a Manufacturing questionnaire. The questionnaire comprised Trade Services an equal number of open-ended and closed- Manufacturing and trade ended questions while the closed-ended Trade and services Manufacturing, trade, and services questions included scale and intensity response options. The questionnaire included Figure 3. Company structure by main sectors 21 questions grouped in 5 sections. The Source: Authors’ research companies were non-randomly selected and the selection criteria covered the companies The results showed in Figure 3 clearly that use or have used the services of factoring indicate that the largest share of companies as short-term financing in their business. The that use factoring as the source of financing is main group is made of all the companies that taken by trade companies (33.33%), then use factoring. The total number of such come the companies in the manufacturing companies in BiH is 130. sector (26.67%) while the companies in the combined sectors (manufacturing, trade, and The research was conducted in the period services) have the lowest share (3.33%). August 2014 - September 2015. The participants were rather passive at first, but Based on the research results, we determined the problem was solved by direct the influence of financing by factoring on communication with companies’ employees companies’ liquidity by sectors, as showed in who were introduced to the importance of the Table 2. research for a wider community. Finally, a Table 2. Influence of financing by factoring on total of 30 companies agreed to fill in the companies’ liquidity by sectors questionnaires, which gave the response rate Improved of 23.08% (30/130). Sector liquidity ∑ Yes No 5. RESULTS AND DISCUSSION Manufacturing 8 8 Trade 8 8 The research included 30 companies on the Service 4 1 5 territory of BiH, coming from different sectors Manufacturing and 5 5 with different numbers of employees and trade annual income. The goal was to establish in Trade and service 3 3 what way the structure and general Manufacturing, trade, 1 1 characteristics of a company affect the usage and service of factoring and in which companies, ∑ 29 1 30 depending on the number of employees, χ2=0.92 df=1 P=0.05 annual income and main sector, factoring is Source: Authors’ research used the most. The research results revealed the data which are presented in the remaining Based on the research results and the section with the appropriate tables and charts. calculated chi square test, the conclusion was made that there is no statistically significant Graphically presented, company structure by difference in participants’ statements on their main sectors is as follows: improved liquidity. Out of 30 participants, 29 gave affirmative answers stating that factoring improved liquidity while a negative answer
Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016 25 /// /// . Kozarević E., Hodžić M. was given in one case only (service company). factoring as a source of financing is most Factoring as a source of financing is mostly favorable for small and medium enterprises. present and used in trade companies. In terms Based on the research results, we determined of improved liquidity, trade and the influence of financing by factoring on manufacturing companies report the companies’ liquidity by employee number, as improvement the most and then come the showed in Table 3. companies functioning in two or more sectors. This was proved by the calculation of the chi Table 3. Influence of financing by factoring on square test and contingency table, and as companies’ liquidity by employee number there were only two possible answers “Yes” Improved and “No”, the degree of freedom is 1. The liquidity values of chi square test diverging from the Employee number Yes ∑ expected values to the extent where their N random appearance is possible in 1% or 5% of o the cases can be presumed such deviation not Up to 50 employees 13 1 14 to be considered random. The contingency 50 - 250 employees 10 10 table data shows that such value is 3.84 while More than 250 6 6 the chi square test value is 0.92. employees ∑ 29 1 30 It can thus be concluded that factoring as a χ2=0.92 df=1 P=0.05 source of financing is most favorable for trade Source: Authors’ research and manufacturing sectors and then service sector while combined sectors come last. Based on the research results and the Graphically presented, company structure by calculated chi square test, the conclusion was employee number is as follows: made that there is no statistically significant difference in participants’ statements on improved liquidity. Out of 30 participants, 29 Up to 50 employees gave affirmative answers stating that factoring
20,00% improved liquidity while a negative answer 46,67% was given in one case only (company with up to 50 employees). Factoring as a source of 33,33% financing is mostly present and used in small companies, then come medium-sized companies and large companies at the end. This was proved by the calculation of the chi Figure 4. Company structure by employee number square test and contingency table, and as Source: Authors’ research there were only two possible answers “Yes” and “No”, the degree of freedom is 1. The In terms of employee number, the research values of chi square test diverging from the results presented in Figure 4 show that the expected values to the extent where their most represented companies that use random appearance is possible in 1% or 5% of factoring as a source of financing are those the cases can be presumed such deviation not with up to 50 employees (46.67%), followed to be considered random. The contingency by those with 50-250 employees (33.33%). table data shows that such value is 3.84 while The companies with more than 250 the chi square test value is 0.92. employees take the lowest share (20.00%). Graphically presented, company structure by It can thus be concluded that factoring as a annual income is as follows: source of financing is most often used in the companies with up to 50 employees, i.e. small companies. As previously mentioned,
/// 26 Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016
. Influence of financing by factoring on company’s liquidity in Bosnia and Herzegovina ///
Company structure by main sectors of the chi square test and contingency table, Up to BAM 3 million and as there were only two possible answers “Yes” and “No”, the degree of freedom is 1. The 23,33% 30,00% values of chi square test diverging from the 46,67% expected values to the extent where their random appearance is possible in 1% or 5% of the cases can be presumed such deviation not to be considered random. The contingency table data shows that such value is 3.84 while Figure 5. Company structure by annual income the chi square test value is 0.92. Source: Authors’ research The research into the main characteristics In terms of annual income, the research (features) of using factoring services is results presented in Figure 5 showed that the primarily aimed at defining the motives for participants singled out as dominant the using factoring services as well as companies with the annual income of BAM 3- advantages and disadvantages of using 30 million (46.67%). They are followed by the factoring as a source of company’s companies with the annual income of up to BAM 3 million (30.00%), while the companies financing. with the annual income of more than BAM 30 million are least represented. Based on the research results, we determined the influence of financing by factoring on 30% One year companies’ liquidity by annual income, as showed in Table 4. More than one year Table 4. Influence of financing by factoring on 70% companies’ liquidity by annual income Improved Total annual income liquidity ∑ (in BAM) Yes No Figure 6. Company structure by the length of Up to 3 million 8 1 9 factoring usage 3 – 30 million 14 14 Source: Authors’ research More than 30 million 7 7 ∑ 29 1 30 The research results presented in Figure 6 χ2=0.92 df=1 P=0.05 clearly indicate that the largest number of Source: Authors’ research participants stated that the period of factoring usage is over a year. This leads to the Based on the research results and the conclusion that factoring as a source of calculated chi square test, the conclusion was financing is becoming a regular way of made that there is no statistically significant financing in the companies that provide difference in participants’ statements on financial resources in that way. This supports improved liquidity. Out of 30 participants, 29 the statement that companies use factoring in gave affirmative answers stating that factoring longer periods, which means that there is a improved liquidity while a negative answer practice of solving financial problems in this was given in one case only (company with the way. In other words, factoring is a good annual income up to 3 million). Factoring as a financial instrument for overcoming the “gap” source of financing is mostly present and used between the sale of goods and the collection of in the companies with annual income of 3 to accounts receivable. 30 million. This was proved by the calculation
Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016 27 /// /// . Kozarević E., Hodžić M.
120,00%
100,00%
80,00%
60,00%
40,00%
20,00%
0,00% Fast access to Price of factoring Better financial Larger volume of financial resources service position sale (service Advantages of factoring usage providing)
Figure 7. Company structure by advantages of factoring usage Source: Authors’ research
The research results presented in Figure 7 financial position, and larger volume of sale or clearly indicate that the largest share is service providing. reserved for the statement that the main Graphically presented, company structure by advantage of factoring is fast access to disadvantages of factoring usage is as follows: financial resources, followed by better
120,00%
100,00%
80,00%
60,00%
40,00%
20,00%
0,00% Rate/ speed of ccess Price of factoring Collateral Risk of loss due to Risk of regression to financial service higher commission resources Disadvantages of factoring usage Figure 8. Company structure by disadvantages of factoring usage Source: Authors’ research
Figure 8 shows the number and structure of Therefore, it is beyond doubt concluded that companies regarding the disadvantages of the most represented attitude is that the main factoring usage. Out of 30 participants that disadvantage of factoring usage is the price of gave statements related to various answers factoring service followed by the risk of offered, 26 said that the price is the main regression. Hence, factoring is a relatively disadvantage of factoring as a source of costly source of financing when compared to financing, 15 circled the risk of regression as other short-term sources of financing along one of the disadvantages while only few opted with the fact that there is a risk of regression. for the risk of loss due to higher provisions Table 5 shows the research results related to and collateral. None of the participants participants’ attitudes towards factoring as a claimed the disadvantage of factoring to be source of financing in comparison to short- the speed/rate of access to financial term credits. resources, which was noticed during the analysis of the main advantages of factoring.
/// 28 Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016 . Influence of financing by factoring on company’s liquidity in Bosnia and Herzegovina ///
Table 5. Participants’ attitudes on factoring as a source of financing Yes No P f % f % It is easier to provide collateral for factoring 22 73.33 8 26.67 0.0003 than short-term credit There is risk in factoring 24 80.00 6 20.00 0.0000 business Factoring is sufficiently developed (established) 25 83.33 5 16.67 0.0000 for our conditions Law on factoring needs to 22 73.33 8 26.67 0.0003 be adopted Source: Authors’ research
Since for all the aspects of factoring usage Better financial position of a 43,33% 56,67% p<0.05, it is concluded that there is a company statistically significant difference in the Larger volume of sales 43,33% 56,67% percentage of agreement and disagreement with the statements. In other words, the Increased export capacity 10,00% 90,00% statement is accepted that factoring is the most attractive instrument of financing Increeased competitiveness 26,67% 73,33% precisely because the largest share of the Better liquidity 96,67% 3,33% participants believes that it is easier to provide collateral for factoring than short- 0% 20% 40% 60% 80% 100% term credit. In addition, most participants Yes No consider that factoring is sufficiently Figure 9. Main indicators of company’s position developed for our conditions, law on factoring improvement due to factoring usage needs to be adopted, and that there is a risk of Source: Authors’ research regression in factoring. This basically means that regardless of the risk of regression, the Based on the resulted showed in the following participants readily make factoring businesses figure, out of 30 participants, 19 (63.33%) as they are easier ways for them to obtain stated that the main indicator of company’s cash and improve liquidity. position deterioration is cost increase. It was already concluded that factoring is a “costly” The remaining part of the article brings the source of financing when compared to other research results on the influence of financing short-term sources such as short-term credit. by factoring on the improvement or deterioration of company’s position. Based on Of course, the cost of factoring reduces the the data presented in Figure 9 it is evident profits of each individual transaction or sound that out of 30 participants 29 (96.67%) stated management of trade accounts receivable that the main indicator of company’s position through a shortening of the period of improvement is better liquidity, which means collection which increases turnover ratio that company really increases its liquidity by whereby increased turnover ratio contributes using factoring services. Eight participants to the realization of large scale of the total opted for higher competitiveness (26.67%) number of units to be supplied and thus which, being lower than 50%, leads to the increases the sum total profit (Ricka and conclusion that by using factoring companies Alihodzic, 2016, 305). do not increase their competitiveness.
Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016 29 /// /// . Kozarević E., Hodžić M.
70,00% 60,00% 50,00% 40,00% 30,00% 20,00% 10,00% 0,00% Increased costs Loss of income Loss of direct due to high contacts with the commisions client
Figure 10. Main indicators of company’s position deterioration due to factoring usage Source: Authors’ research
Regarding the research into whether the nature. The crucial problem related to companies use some other sources of short- company’s financing is generally the issue of term financing but factoring, 22 participants liquidity. Companies attempt to overcome (73.33%) stated that besides factoring they these problems by introducing modern, use bank credits while 19 of them (63.33%) specific methods, techniques, and ways of stated that factoring is different (better or financing. One of them is certainly factoring worse) from some other source of financing. business as a modern product aimed at improved liquidity by selling short-term CONCLUSIONS AND RECOMMENDATIONS accounts receivable. Factoring might soon become a tool necessary for economy’s The research showed that factoring is functioning, which means that traditional sufficiently established for the business sources of financing, which include short-term conditions in BiH but that the law on factoring credits, are slowly becoming our past. Modern needs to be not only adopted but fully ways of financing are becoming more and implemented too. It is a fact that in many EU more important. countries without direct factoring regulations in the form of a special law, factoring business The research results lead to the conclusion is as successful as in the countries which have that factoring is by no means a better choice such regulations. This is enough to conclude for the companies struggling with liquidity that explicit legal regulations are not always and wanting to overcome this problem safely. necessary for a financial business to function They can achieve this by using factoring while in a country. overcoming the liquidity problem may lead to a better financial position of a company as The general problem of factoring as a financial well as to better export capacity for the business is that it lacks sufficient market export-oriented companies. It is interesting to recognition, even in the EU countries where it mention that companies mainly use factoring is traditionally more developed. What is also for over a year, which means that factoring needed is the harmonization of legal contracts are renewed regardless of high regulations relevant for factoring activities at prices of factoring businesses. Factoring is the level of all EU countries, so as to increase certainly an interesting way of financing the volume of international factoring current transactions. Unlike other types of operations. borrowing financial resources where debt Under modern business conditions, increases debtor’s liabilities, in factoring companies face a series of specific problems financing is primarily made on the basis of that impede successful business realization. assets (a part of assets related to accounts Many difficulties that come with modern receivable from buyers). This does not business activities are primarily financial in increase debt, it keeps credit worthiness and
/// 30 Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016 . Influence of financing by factoring on company’s liquidity in Bosnia and Herzegovina /// improves liquidity, which is primarily in the Istuk, Ivor, and Miroljub Labus. 2015. Factoring focus of small and medium-sized enterprises. and reverse factoring reforms in the EBRD region. Focus section. It can be said that the results of this research Ivanovic, Zoran. 1997. Financijski menedzment contribute to the analysis and understanding [Financial management]. Opatija: Sveuciliste u of factoring businesses and show in which Rijeci. way financing by factoring influences Kallberg, Jarl G., and Kenneth L. Parkinson. 1993. liquidity, competitiveness, and export capacity Corporate liquidity: Management and of companies. However, this research is only a Measurement. Homewood, Illinois: Richard D. preliminary step towards research into Irwin, Inc. factoring as a modern way of financing as Klapper, Leora. 2006. The role of factoring for financing small and medium enterprises. compared to short-term credits as traditional Journal of Banking & Finance 30 (11): 3111- ways of financing. The recommendations for 3130. further research may be summed up as Markovic, Ivan. 2000. Financiranje: Teorija i praksa follows: financiranja trgovackih drustava [Financing: Theory and practice of company's financing]. To establish if by using factoring Zagreb: RRIF. companies reduce their own balance of Miletic, Marko, and Domagoja Buljan Barbaca. accounts as factors take over the collection 2015. Determinants of the amount of banks' of accounts receivable, thus improving loans to non-financial corporations in the their credit worthiness without exceeding Republic of Croatia. 4th International Scientific the bank limit. Symposium „Economy of Eastern Croatia – vision and growth“, Osijek, 21st-23rd May, In: Masek To examine the trends of factoring Tonkovic (Ed.), Proceedings (741-748), Osijek: business development in the EU and Ekonomski fakultet u Osijeku compare them with the trends of factoring Mishkin, Frederic S., and Stanley G. Eakins. 2005. business development in BiH and the Financijska trzista i institucije [Financial Western Balkans. markets and institutions]. Zagreb: Mate. Pesic, Marko. 2011. Financiranje razvoja malog i REFERENCES srednjeg poduzetnistva u Republici Hrvatskoj [Financing SMEs in the Republic of Croatia]. Bakker, Marie H. R., Leora Klapper, and Gregory Ekonomski vjesnik / Econviews: Review of Udell. 2004. The Role of Factoring in contemporary business, entrepreneurship and Commercial Finance and the Case of Eastern economic issues XXIV (2): 430-435. Europe. World Bank Working Paper No. 3342. Ricka, Zeljko, and Almir Alihodzic. 2016. Liquidity Beck, Thorsten and Asli Demirguc-Kunt. 2006. management by establishing factoring market Small and medium-size enterprises: Access to in Bosnia and Herzegovina. 5th International finance as a growth constraint. Journal of Scientific Symposium “Economy of Eastern Banking & Finance 30 (11): 2931-2943. Croatia – vision and growth“, Osijek, 2th-4th June, Bogdan, Sinisa, Suzana Baresa, and Sasa Ivanovic. In: Masek Tonkovic (Ed.), Proceedings (298- 2010. Portfolio analysis based on the example 307), Osijek: Ekonomski fakultet u Osijeku of Zagreb Stock Exchange. UTMS Journal of Ristic, Dragica, and Zeljko Ricka. 2015. Mogucnost Economics 1 (1): 39-52. koristenja faktoringa na trzistu Bosne i Brkic, Alaudin. 2011. Normativno uredjenje Hercegovine i regije [Possibilities of factoring ugovora o faktoringu u svjetlu domacih i usage in BiH and the region]. Tranzicija, 17 medjunarodnih izvora prava [Normative (35): 57-75. regulation of factoring contract in terms of Rovcanin, Adnan, Adisa Omerbegovic, and Muamer domestic and international sources of law]. Halilbasic. 2005. Mogucnost razvoja faktoringa Anali Pravnog fakulteta Univerziteta u Zenici 4 u BiH [Factoring market assessment in BiH]. (7): 177-200. Southeast Europe Enterprise Development Guiliano, Angela, Peter Mihok, Reka Moksony, Publication, Sarajevo. Martin Vejacka, and Kristina Vincova. 2009. Spasic, Ivanka, Milorad Bejatovic, and Marijana Financial services offered by a multidisciplinary Dukic-Mijatovic. 2012. Faktoring – instrument B2B network. Economie a Management (E+M) financiranja u poslovnoj praksi – nekoliko 1/2009:77. vaznih pravnih aspekata [Factoring –
Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016 31 /// /// . Kozarević E., Hodžić M.
instrument of financing in business practice – some important legal aspects]. Ekonomska istrazivanja / Economic research 25 (1): 191- 211. Trifkovic, Milos, and Sanjin Omanovic. 2001. Medjunarodno poslovno pravo i arbitraze [International business law and arbitrages]. Sarajevo: Ekonomski fakultet Univerziteta u Sarajevu. Zelenika, Ratko, and Jasmina Srdoc. 2010. Likvidnost i solventnost: Kljucni cimbenici razvoja poduzeca u uvjetima ekonomske krize u Republici Hrvatskoj [Liquidity and solvency: Key factors for the development of enterprises in terms of economic crisis in the Republic of Croatia]. Racunovodstvo i financije, 56 (2010), 7: 173-181.
1 http://www.ubs-asb.com/Portals/0/Casopis /2006/11_12/UBS-Bankarstvo-11-12-2006- Ekoleks.pdf , Accessed: 13/04/2014 2 http://www.cbbh.ba/, Accessed: 13/04/2014 3 http://www.cbbh.ba/, Accessed: 13/04/2014 4 http://www.cbbh.ba/, Accessed: 13/04/2014 5 http://intrum.crmplatform.nl/documents/IJ_EPI- 2014_ENG_Sec.pdf, Accessed: 15/12/2015. 6 http://www.fzofbih.org.ba/userfiles/file/ Program%20rada_finansijski_2016.pdf, Accessed: 18/10/2016
/// 32 Economic Review – Journal of Economics and Business, Vol. XIV, Issue 2, November 2016