Price Club aftermath

By Miriam Dunn

As the business world reels from the disastrous crash of the Price Club supermarket and looks to see what lessons can be learned from it, two of the key questions being asked by observers are why the banks were not providing a factoring service for the traders involved and whether the government should intervene.
Some suppliers, who collectively incurred debts of Lm8.5 million when the supermarket giant crashed, said they would like to see the banks play a role in helping businesses achieve more secure trading conditions and help reform certain business practices.
But according to some observers in the business world, certain services are available from the banks, it is simply that businesses weren’t making use of them.
The observers put this down to a combination of reasons, most notably the terms and conditions on which the banks make the service available.
"For example, the banks will usually only advance bills of exchange to the value of 80% of the debt and they will also usually insist that the trader has full liability for the first six months," one observer said. "If traders have decided not to take up these terms and conditions which the bank is making available one has to determine whether the businesses are being too greedy or whether the banks are too rigid in their stand."
On the issue of whether the government should take the lead in encouraging more attractive conditions for traders, the observers stressed that it was not that simple.
"If you look at the idea of the government setting up a financial institution which might provide a better set-up, you have to bear in mind that it would be using public funds and therefore must remain profitable," one said. "Granted, such an institution could take on 90% of the risk instead of 80% and take liability after three months instead of six.
"But where does that leave everyone if it goes bankrupt?"
So far, both major banks in Malta have been cautious over providing a fully-fledged factoring service and stressed that it is no substitute for prudent credit management.
"While factoring is a relevant tool in enhancing the development of debt management infrastructure, non-bank costs render factoring transactions expensive," Frank Xerri de Caro, Bank of Valletta’s chief officer credit management and retail banking told this newspaper yesterday. "In any case, a factoring service will, of course, only factor invoices on good names.
"Consequently, factoring can provide business operators with a thermometer that can provide guidance in adopting sustainable credit policies."
The practice of factoring involves a company which is engaged in the business of financing accounts receivable – often a bank – assuming the credit risk of account debtors and receiving cash as the debtors settle their accounts.
Mr Xerri De Caro stressed that managing debtors and ensuring their good quality is one of many key aspects of any business management.
"The endemic high-gearing scenario that frequently characterises domestic business presents the business community itself both as suppliers and debtors with an inherent challenge to cashflows within tight parameters," he said. "This same climate also presents banks with a challenge to underpin economic growth with continued support through lending.
"In so doing, banks need to apply prudent lending policies to ensure a healthy lending portfolio."