Peru: Factoring Scheme for Micro and Small Enterprises
Like many emerging markets, access to finance is a pressing need for micro and small enterprises (MSEs) in Peru. The World Bank worked with the Peruvian authorities under a FIRST-funded project to design a factoring scheme that uses a financial structure and a technology platform to purchase accounts receivable from the large companies that supply many SMEs. Doing so frees up working capital that the suppliers can use to extend more credit to SMEs, helping to solve the access to finance problem. It also benefits the suppliers and other stakeholders.
Due to the close relationships between large suppliers and their MSE customers, the suppliers can provide a lot of credit to SMEs at relatively low risk and cost. The accounts receivable portfolios of these large suppliers are diversified and carry low risk. These qualities are the building blocks for the financing scheme.
The scheme involves creating a fiduciary agent, such as a trust, to purchase accounts receivable from corporate suppliers on a revolving basis. During the initial implementation in Peru, the local development bank COFIDE will fund the trust. Once the scheme is implemented, the fiduciary agent can raise funds in the capital markets. The scheme minimizes the risk involved in the transaction through the financial architecture and the operational platform used to manage the flow of receivables.
Invoice factoring has several benefits for the SME customers. First, participating SMEs receive more financing from suppliers, which they can use to increase sales. In addition the scheme helps SMEs get better credit terms elsewhere, because they build credit histories that are valuable when they approach other financial intermediaries. Specifically, the operational platform generates payment reports—similar to those provided by a credit bureau, with proof of historical fulfillment of payments—for the SMEs that participate in the scheme. The SMEs can then use these independent payment reports when they approach banks, improving their chances of receiving bank credit.
Large suppliers benefit from transferring a portion of their accounts receivable portfolio to a third party, improving their financial ratios. That is, factoring improves the liquidity of suppliers by substituting cash for accounts receivable. The suppliers can use this additional (off balance sheet) financing to increase sales of their products and services by providing additional credit to their MSE customers without negatively affecting working capital. In addition, due to the guarantee structure, the financing cost implicit in the factoring scheme will usually be lower than traditional bank financing. Moreover, reducing the cost of funding will improve suppliers’ rate of return on assets. Finally, the system will help suppliers achieve better risk management of their client SMEs.
Based on the design developed under the FIRST-funded project, the World Bank, COFIDE and Capital Tool Corporation, working directly with structuring, legal and tax advisors, are coordinating an initial implementation of this factoring scheme in Peru. In the first phase, COFIDE and the supplier through a Fiduciary agent create a special purpose vehicle (SPV). The SPV will then issue a term note that COFIDE will purchase, providing a US$5.0 million capacity for financing SMEs. The SPV will use the proceeds to purchase pre-selected accounts receivable from suppliers on a revolving basis, extending financing to approximately 50,000 SMEs, discounting invoices of US$150 average size and 14 days maturity. In the second phase, the rating agencies will determine the risk of the financial instrument issued by the SPV. This rating will allow the SPV to sell participations in the financing to local institutional investors. At that time, it could cover 250,000 client SMEs for a total funding amount of US$30–40 million.
This factoring scheme was one of 14 winners of the challenge launched by the Group of 20 (G-20) countries to find new forms of financing for MSEs. This recognition comes with support to cover the cost of implementing the scheme in other countries The solution also attracted interest from other multilateral lending agencies. The Inter-American Development Bank and its finance arm MIF have indicated their strong interest in participating as investors with local institutions that enter into the financing of the second phase.