China's online travel agency Tuniu became the first online travel agency stepping into the tourism factoring field as it announced on September 16 that it has been approved to establish two commercial factoring companies with an investment of RMB1.3 billion.
"With a year, the company is expected to provide over RMB1 billion worth of commercial factoring quota for current partners and other tourism enterprises with potential demand," said Jie Chen, general manager with the financial service department of Tuniu.
Broadened customer base
Commercial factoring is the transfer of account receivables by a company to a factoring firm in return for immediate payments of the receivables from the factoring firm. The factoring firm offers financial service such as collecting the money from debtors and other financing, debt guarantee and account receivable management services.
With the commercial factoring offshoots, Tuniu can service more than 8,000 existing partners as well as offering factoring service to hotels, attractions and other travel companies in the industry, to support the demand of more small- and medium-sized travel businesses.
“The service targets of commercial factoring will be many times more than our existing financing service for its supply chain. As the targets have become broader, the need for commercial factoring is likely to increase significantly,” said Mr Chen, adding that quality factoring assets can be used on Tuniu’s financial platform for receivables transfer to service the financial needs of consumers.
Lower financing costs
Tuniu’s commercial factoring companies are foreign capital companies that can handle overseas financing and obtain lower cost capital, thus they are able to offer competitive financial services to small- and medium-sized companies in the industry.
The current base rate for one-year loans in China is 4.6%, whereas US dollar loans overseas carry an interest rate of 2%. The lower cost for obtaining capital can help lower the overall cost of financing.
Hedging against exchange rate risks
The recent fluctuations in RMB exchange rate have highlighted the importance of managing the risks of exchange rate fluctuations for outbound travel businesses. As Tuniu’s factoring companies are foreign capital companies, they can help outbound travel businesses lock in exchange rates to mitigate such risks when then are making purchases overseas.
For example, an outbound business that buys service of US$1 million from overseas hotels have to make payments in US dollars. If the mean exchange rate is set at 6.2768, for a 30-day term, and the mean rate is changed to 6.3768 on payment date, the buyer’s budget of RMB6.2768 million converts to just US98.43 million, and it will face increased cost of US$15,700 for making the full payment. If the payment is indemnified by Tuniu’s factoring companies, at a rate locked in by Tuniu on the contract day, then the exchange rate risks will be borne by Tuniu, and the exchange rate risks for the outbound wholesaler will be mitigated.
A boon to Tuniu’s new distribution brand
Tuniu launched a new distribution brand, Miaofeng Holidays, on September 8, with first day transaction exceeding RMB5 million. Tuniu Finance is offering credit service to retailers on the Miaofeng platform and factoring service for the wholesalers on the platform, creating a differentiation for the distribution service of Miaofeng to accelerate its growth.
“At present, transactions based on credit are very common in the B2B distribution business. Tuniu’s factoring service can help business partners and relevant parties in the supply chain to get payments quickly and shorten the cash flow cycle, hence giving them capital support,” Mr Chen said.
Financing help for small- and medium-sized travel companies
Tuniu has built a cash reserve of RMB5 billion last year, and it has provided capital support to the tune of RMB1 billion to partners so far this year.
Its supply chain financing is taking shape after six months in operation, with the size of credit growing at a monthly rate of 40%, from about RMB10 million a month early this year to about RMB100 million per month by July. Such financing helps small- and medium-sized travel business partners resolve financing issues and promote integrated development of the industry.
Rosy prospect for commercial factoring
Commercial factoring is a common practice internationally, but emerged in China only in the second half of 2012. It gained prominence since 2013 when internet and ecommerce companies flocked to commercial factoring. Their entries to the business ensure a rosy prospect for the sector. According to a report released by Commercial Factoring Expertise Committee of CATIS, China's commercial factoring is expected to see annual business value reach RMB160 billion by the end of 2015 and RMB500 billion in the coming three to five years.
“In the next few years, the growth trend of commercial factoring is a certainty. We will continue to upgrade our commercial factoring service and help travel industry to growth as a whole,” Mr Chen said.(Translation by Shuk)
