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Wednesday, April 23, 2014
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VTB Bank to Insure Risks of Exporters to Russia

Written by Madona Gasanova, The FINANCIAL

01/07/2013 10:02 (295 Day 21:14 minutes ago)

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The FINANCIAL -- VTB Bank Georgia has started offering the new financial instrument - Factoring, to its consumers. Wine company Kindzmarauli Marani has been one of the first to receive over USD 2 million of financing within the frames of the new product. The funding has no limits and is ready to satisfy consumers’ demands.

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Factoring offers optimization of cash flow and freeing up working capital. Instead of waiting for payment from their customer, suppliers receive money from factoring. Services allow consumers to deliver products with payment upfront, while customers may continue to defer payment.

Factoring is a set of financial services you receive in exchange for transferring your accounts receivable. It includes: No-collateral funding - Invoices you issue to debtors who have been transferred for factoring are immediately converted into ready cash. Insurance against late payment - A grace period is provided against the event of non-receipt of a buyer’s payment caused by their inability to pay or delayed payment. Management of accounts receivable - Bank conducts audits of buyers’ ability to pay and business reputation, as well as daily monitoring of the status of accounts receivable. It provides access to special software with which users can track the status of the buyer’s transactions in real time.

 

With financial resources growing as sales grow, suppliers can purchase more, sell more, use marketing initiatives, update and expand their production capacity, as well as enter new markets.

“The demand for this service is quite big,” Artem Sharibzhanov, Adviser of GM in International Issues of VTB Factoring, told The FINANCIAL.

“We try to encourage Georgian products to enter Russian markets fast and effectively. Georgian products are popular in Russia. According to Russian media the first batch of Borjomi water was purchased immediately. So I am optimistic that all the rest of the products will be equally in demand,” said Sharibzhanov. The import of Georgian wine and water was banned by MOSCOW in 2006.

According to the National Statistics Center of Georgia, Russia was the fifth top trading partner by turnover in January-May 2013. Total volume of export amounted to USD 30,949.1 thousand. The share of import reached USD 193,277.8 thousand.

The share of wine by major commodity positions by exports in January-May 2013 was 2.7%.

“The sum will be issued in accordance with the specifics of each individual project. As a member of VTB Group we have sufficient resources to sufficiently meet the demands. We issued a loan amounting to GEL 8 million for the wine company Kindzmarauli Marani. This is the starting point of the limit that will further increase in accordance with our client’s business development,” Sharibzhanov said.

“Georgian consumers that are used to credits will find it easy to switch to the factoring service due to its multiple and flexible conditions. Factoring means risk insurance that will allow our consumers to increase their business. The risk of getting your money from an importer is the main problem on new markets. Risk insurance and guarantee that you will get your money back is the main advantage of factoring,” said Archil Kontselidze, CEO at VTB Bank Georgia.

The main difference between factoring and a loan is that factoring does not require any collateral. However, Sharibzhanov said that that does not increase the risks for the bank. “The products that our clients sell are factual mortgages for us,” he explained.

The External Merchandise Trade turnover (excluding non-organized trade) of Georgia amounted to USD 3,881 million in January-May 2013, 4 percent less than from the same period of the previous year. Compared to January-May 2012, the value of export grew by 4 percent and reached USD 1,001 million, while import decreased by 7 percent amounting to USD 2,880 million. The trade deficit reached USD 1,878 million and amounted to 48 percent of the total trade turnover.

Cost comparison -- It is very tempting to equate money received in the form of bank loan and money received through factoring, but this is misleading, VTB says. “Factoring and borrowing work differently to replenish your working capital. They involve different degrees of control and provide different opportunities.”

“In the case of a bank loan, the borrowed funds get tied up in the form of accounts receivable, at best, or, at worst, lose their value while sitting in a bank account. Money received through factoring, however, is constantly being put to work and earning profit.

Loans are listed as liabilities, thus reducing the net value of the company. Factoring is an off-balance-sheet instrument, making it possible to multiply earnings and profit without increasing liabilities.

 

In the case of a bank loan, you receive the money as a one-time payment, whereas with factoring your business obtains ongoing financing as needed.

 

For example, if you borrow GEL 100,000 from the bank at 12% annual interest, you receive a one-time payment of GEL 100,000. Subsequently, you pay GEL 1,000 monthly for the use of this loan, and at the end of the year you must repay 100,000 to the bank. Or, the bank may extend you a credit line, such that you can draw money from the line as needed, up to a limit, but you are required to pay for this privilege in advance (a service which is beyond the reach of many companies). If you suddenly need additional resources, the entire loan application process has to be started all over again.

If you transfer GEL 100,000 each month for factoring, you will be able to use GEL 1.2 million (12 x 100,000) in the course of a year. Assuming that the cost of the factoring services is 2% of the volume of accounts receivable you transfer, then your annual cost for factoring will be 12 x 2,000, or 24,000, which is 2% of 1.2 million. And you owe nothing to anybody at the end of the year.

 

 

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