Bank Leumi (TASE: LUMI) is marking factoring business as a growth engine. Sources inform "Globes" that as part of the decision by the bank's corporate and commercial division, headed by Koby Haber, to expand in this sector, a cooperation agreement was recently signed with the Israeli Credit Insurance Company Ltd. (ICIC) (TASE:BSSC).
Under this agreement, ICIC will produce credit insurance policies for Bank Leumi's factoring customers' activity. Bank Leumi and ICIC will offer the customer a one-stop shop. Issuing the policy will also reduce Bank Leumi's risk in providing credit, enabling the bank to utilize the insurance to expand its customers to include those with higher risk. Credit insurance is already available, but the fact that Bank Leumi is buying the policies collectively in the name of its customers should enable it to offer the customer a better price for the insurance than a customer directly asking ICIC for an insurance proposal would obtain.
ICIC, owned by Harel Insurance Investments and Financial Services Ltd. (TASE: HARL) and Euler Hermes, insures local exporters and suppliers selling to their customers on credit against non-payment of their customers' debts. Haber said, "Cooperation with ICIC is a milestone in the expansion of factoring at Bank Leumi. It is expected to enable the business companies working with Bank Leumi to obtain a supplementary financing solution."
Factoring is a financing method through a company sells its customers debts to it to the financing company, and immediately receives the amount of the debt, minus interest and commission paid to the lender. This method improves a business's cash flow, while the business does not have to put up collateral. As for the price, in principle, the interest rate in factoring is regarded as higher than in ordinary credit, but since the bank rates credit risk primarily according to the customers' risk, a situation can arise in which the cost of the credit is the same, or even lower, especially when small businesses are concerned. For example, a cheese manufacturer selling to large supermarket chains can use factoring, relying on the credit rating of the large chains.
Good spreads
Bank Leumi has been active in factoring for years, but in recent years has decided to expand in the sector. The factoring portfolio of Bank Leumi, regarded as one of the biggest players in this segment, has grown substantially in recent years, and currently totals several billion shekels. One reason for the bank's decision to expand its factoring business is the good spreads in it. Furthermore, in contrast to ordinary business credit, in this area, there is less competition from investment institutions. The reason is that in factoring, credit is usually for up to 120 days, while investment institutions are looking primarily for long-term credit.
In addition, as part of its expansion in this sector, Bank Leumi plans to issue a digital factoring solution in the near future for conducting discounting transactions directly with customers.
Published by Globes [online], Israel Business News - www.globes-online.com - on July 6, 2017
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