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Spain: Supply Chain Finance Overview

Introduction

Spain’s economy is still going through a difficult period and lack of trust is one of the main issues. In this environment, business volumes have been reduced and access to liquidity is complicated. However, reverse factoring is still one of the most popular payment methods among Spanish enterprises.

Industry Environment

Spain has not only suffered as part of the worldwide financial crisis but also the bursting of the real estate housing market bubble and a change in the economic model, which has slowed the recovery even more.

Gross domestic product (GDP) grew four per cent in 2006 and 3.6 per cent in 2007. After a decade of a strong expansion, in the summer of 2008 the Spanish economy slowed, coinciding with the crisis evolving in the USA. But the recession started by the end of this year registering internal growth of only the 0.8 per cent. In 2009 the economy decreased by 3.7 per cent and in 2010 it reached its lowest level before starting a recovery after six consecutive quarters of recession. GDP fell a 0.1 per cent during 2010 and the unemployment rate reached 21.29 per cent.

The private and public de-leveraging process is still a burden for the recovery. The public sector, enterprises and also families are trying to reorganize their finances while the country is trying to implement structural reforms as a starting point for solid recovery.

The high public deficit, which should be cut down to six per cent in 2011 from the 11.4 per cent we had in 2009, the serious debt crisis from the EU and the rising slant of interest rates hinder any real improvement in the next few months. On the other hand the foreign sector and the tourism industry are helping to maintain GDP in positive figures.

In this scenario, the commercial finance banks that work with have a crucial role. The refinancing and new debt structuring have helped many companies to recover and to control their businesses. Banking products mainly associated with new investment and capital expenditure have suffered the effects of the crisis.

With regard to payment methods, transfers and checks have been the most used but reverse factoring is becoming increasingly popular.

In this crisis of trust, banking products that offer more security have been the ones with the most prominent role in the international and domestic market. That is why reverse factoring has been revealed as one of the financial products that best fits in this economic scenario.

From the client’s point of view it offers optimization of his working capital, reduction of back office administration, the possibility to postpone payments and offers additional benefits through rebates. It also contributes to improving relationships with suppliers and helps to close deals because it guarantees the debt, advances funds and turns payable amounts into cash, optimizing the balance sheet.

Nowadays one of the main issues for suppliers is the cost of sales and the default rate. But if they choose to advance a payment through a reverse factoring program they avoid concerns because it does not involve exposure within their own bank. And in the environment, in which access to credit facilities is limited, it is one of the best methods of obtaining cash, sometimes even better than their own credit lines. It is also without exchange risk and simplifies back office procedures for suppliers.

Market Performance and Supply

The maturity and development of reverse factoring in Spain is reflected in its growth figures - it has shown a continuous rise since 2005 with much stronger growth at the beginning of the crisis. In 2010 it grew 9.3 per cent in comparison to the 1.3 per cent from the previous year. The compound annual growth rate from 2005 until 2010 is 18 per cent.

The main aspect that has influenced the significant rise in reverse factoring has been that the public sector in Spain has chosen it as their preferred payment method. The public sector has very high volumes of purchases and moving to reverse factoring has substantially increased the level of assignment and advances. The public sector has very long payment terms and, when choosing this option, its suppliers are given sufficient comfort in executing such transactions.

There has been a new enactment of the law against defaults (Law 15/2010, 5 July, modifying Law 3/2004, 29 December against delinquency in commercial transactions). This is attempting to improve the payment terms for enterprises and public bodies. The previous law which commenced in 2004 was proven to be inefficient in the current environment. The crisis has meant a higher rate of payment defaults, delays and extensions in every single sector and particularly for small and medium size enterprises that rely on short-term credit. Those limitations of liquidity have often caused an insurmountable obstacle for the continuity of their businesses. This new law aims to amend disparities and promote competitiveness and reach well balanced growth in the Spanish economy and to create stable employment.

The main points of this new law are:

• It removes agreement of payment terms between the seller and the buyer. Until the enforcement of this law this was the usual way to fix payment terms. However, because of the limited negotiation power of small and medium enterprises they were usually longer than desired by them.
• The term starts when the delivery or the provision of services is completed.
•  A report from the auditors about payment terms has to be included in annual accounts.
• There is a transitional period for adapting to this law which ends December 2012, and there are different conditions for some sectors.   

The approval of the law and its enforcement has arisen at a sensitive time because of the difficulty in access to credit facilities. But there was a need to legislate on this issue in order to ‘benefit of the Spanish economy’ as some commentators put it.

It is important to state that the banking sector in Spain also offers the possibility to extend payments for clients through reverse factoring programs. This is the solution that the sector is offering in order to make easier the transitional period for clients in fulfilling the new payment terms and for their suppliers receive funds within the new legal framework.

In Spain the reverse factoring market is very concentrated with 97 per cent of the market managed by nine financial institutions and the remaining three per cent managed by twelve.

Y2010: RECEIVABLES FINANCE MARKET SHARE OF MAIN PLAYERS

Y2010: REVERSE FACTORING TURNOVER BY INDUSTRY (%)

The sectors that use reverse factoring the most are manufacturing, construction and commerce followed by businesses from the energy sector, transport and medicine. The remaining 29.05 per cent is shared, among the fishing industry, agriculture and the accommodation industry.

Future Trends

Another aspect of reverse factoring that has increased business volumes and will do more in the short term, has been the improvement in computer systems that support the transactions. Nowadays it is quite usual for clients to manage their payments through the internet with access to web pages by both clients and suppliers. This simplifies the process for the clients of a reverse factoring program terms of remittances, checking future maturities and reporting on activity and accounts. The suppliers can also manage their advances on line and also the status of their invoices. Mobile alert systems have also been developed to connect to smart phones.

In the last few years reverse factoring has gone from being an innovative product and almost unknown in some sectors to one of the more common payment methods in Spain. The existing economic environment, the enforcement of the new law, IT developments and feature enhancements have made and will continue to make reverse factoring the most popular payment method.

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