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Also known as factoring, Obelisk's affiliates specialise in accounts receivable financing, a traditional form of business lending that has been around for centuries. Factoring’s appeal has become particularly apparent at a time when banks are failing to fulfil their traditional roles as lenders.
Invoices and post-dated cheques are purchased by third parties from companies that would rather not wait the standard 30 to 90 days for their customers to settle accounts. These are bought at a discount, immediately releasing cash for the company, and the third party makes the profit when payments are fulfilled.
Factoring is an important alternative to the banking sector for the financing of small and medium sized enterprises. Given the high barriers to entry into the formal banking system in some markets, factoring companies have found an important market niche.
Factoring is a highly regulated industry. In addition, because cash advanced can be secured against assets, it should represent a comparatively low-risk form of lending when managed well.
Our model is applied in Brazil, where factoring is a hugely popular way for businesses to raise capital for growth. There, our competitive advantage is derived from the relationships we establish with the businesses we support. Our focus is on SMEs – the engine of growth for most economies and the firms that most benefit from short-term capital.
We work in tandem with the irrevocable purchase of credit rights, in the form of receivables which arise from the sale of goods or services that have maturities ranging from 30 to 90 days. The factoring company assumes the credit risk associated with the negotiable instruments, which has remained historically low for the last 10 years in Brazil due to the severe penalties existing for defaulted credits.
Factoring enables quick and, by Brazilian standards, relatively inexpensive access to financing. Whereas an annual interest rate of 48% for any loan product is considered unacceptably high in many developed Western economies, in Brazil it is regarded as the cheapest form of financing available to the average borrower.
Factoring must be based on commercial sales and is governed by Brazil’s Civil Code. It can be conducted only with ‘legal persons’ or enterprises and not with individuals.
The most common accounts receivable are ‘duplicatas’ (commercial invoices), which account for almost 60% of all factoring receivables. Others are cheques, bills of exchange, bills of lading, warrants, promissory notes and post-dated cheques. The latter can be issued to cover mercantile sales and, as a habit dating from the country’s high inflationary years in the 1980s when consumer credit was virtually non-existent, have evolved to the extent that they became the norm.
These factors go a long way to explaining why Brazil‘s total national default rate on cheques is only around 2.8%. There are just under 700 regulated factoring companies in Brazil, which provide services to more than 65,000 small and medium sized enterprises. 80% of these enterprises belong to the industrial sector, with creditor rights arising from mercantile sales amounting to a monthly turnover of around USD10 billion, or around 6% of all domestic sources of financing. Factoring companies employ more than 6,000 people and are estimated to provide a further 710,000 indirect employment opportunities.
Thus, factoring is a sizeable industry in Brazil and an important affordable source of finance for many firms.
With its importance growing further in light of the global credit crisis, factoring has become a vital component of the Brazilian economy. The national trade association for factoring providers, the Associação Nacional de Fomento Comercial (ANFAC), currently serves more than 120,000 businesses.
Financial technology (fintech) refers to technology designed to increase efficiency in the financial services industry. Consisting of platforms ranging from online banking to data analysis, fintech platforms enhance payment processes, increase security and drive profits in business-to-business (B2B) operations.
The thriving fintech industry promotes growth and efficiency in the financial sector to enable stable and predictable business models. KPMG and Insights’ Venture Capital Report reported that fintech companies had a total of USD19.1 billion in global investments in 2015, a 106 percent increase from the previous year.
Entering the modern era of alternative lending, Obelisk defines itself differently through innovative and efficient means.
Obelisk takes part in the expanding fintech industry by partnering with FIDCs that purchase credit card receivables through the CardTrue platform. Founded in 2012 as a sub-acquiring technology company, the CardTrue platform today incorporates major credit card acquirers in Brazil such as Cielo, Rede, American Express, Stone, Getnet, and Elavon. An acquirer is the party that authorizes merchants to process credit card transactions and passes the merchant’s transactions along to the applicable issuing banks to receive payment.
CardTrue is regulated by the Central Bank of Brazil and provides a platform for sub-acquirers to purchase bundles of credit card receivables at a discount. By displaying credit card receivables and their respective discount rates, risk is further mitigated with the disclosure of the factoring transaction details. Amongst its many competitors, CardTrue is one of the few that utilizes a conciliation system to effectively resolve potential disputes.
Brazil has one of the most advanced banking systems in the world, comprised of a highly regulated financial market that complies to strict lending laws and penalties for credit default. Interest rates for credit cards are extremely high, with the annual interest rate rising to 414 percent in September 2015, being almost 28 times the average credit card rate in the United States. As a result, the historical default rate has remained very low in Brazil.
Credit card consumption is continuing to be the preferred method for payments, increasing by 11.7%, 9.3%, and 7.8% in 2013, 2014, and 2015, respectively. According to the Brazilian Association of Credit Companies and Services (Associação Brasileira das Empresas de Cartões de Crédito e Serviços), also known as ABECS, credit card transactions made in 2015 increased by 7.8% from 2014 to a volume of 5.28 billion, with a value of USD200 billion.
In Brazil, when a bank-issued credit card is used for a purchase, the merchant is required to wait 28 days until the payment is remitted by the respective bank. Merchants can sell their credit card receivables at a discount to avoid the waiting period and release liquidity for continuing operations and facilitating growth. This method of financing is known as a credit card factoring.
The receivables are purchased and the payment is received in full from the bank after the waiting period. With banks acting as the counterparty in these factoring transactions, defaults are lower than traditional forms of factoring, therefore reducing credit risk.
The investments discussed in this website may not be suitable for all investors. Investors should make their own investment decisions based upon their own financial objectives and financial resources and, if in any doubt, should seek advice from an investment advisor. Past performance is not necessarily a guide to future performance, the value of investments and the income from them can go down as well as up.
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