Factoring Background

First, some basic information: The fund (A) signs an agreement with a seller, company (B) after a credit review. Company B sells a product/service to a buyer (C). C will make the payment to A instead of B.

The highly concentrated Brazilian banking system is very healthy with an average tier one capital ratio above the historical European average. As credit expanded over the last 20 years in Brazil, real interest rates and lending spreads have stayed among the highest in the civilized part of the world.

Historically, small and medium sized companies used to pay 10% per month for their financing. In Brazil’s generally bureaucratic financial system, alternative financial solutions, such as factoring, have surfaced over the last few decades. Leading up to where we are today, the factoring market has shown annual organic growth rates in the mid-teens during the last ten years. The total market size is approaching USD 100 bn.

More than 100,000 small to mid capitalization companies are using factoring as the primary source of external financing for their businesses. As the market has evolved, so has the industry process to enforce payments and thereby minimize credit losses. The industry average default rate is currently running at about 3%.

Different factoring segments offer varying discounts depending on the duration, the chosen industry segment, the level of direct retail exposure, credit quality, payment history and many other factors. These will bring the monthly financing cost for the best in class down towards 2-3%.