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Factoring is an effective alternative liquidity option for small and midsized enterprises (SMEs) as well as large companies that need fast access to trade finance.

Factoring Is Boosting Trade and Supply Chain FinanceARTICLE

By Elena Malykhina

Trade finance is like a puzzle with many pieces that come together to enable various processes and transactions. One particular practice, called factoring, has contributed to the growth of trade and supply chain finance in recent years. Factoring is when vendors of goods and services sell their receivables (in the form of outstanding invoices) at a discount to a finance provider (also known as the “factor”).

Factoring – forecasted to rise globally at a compound annual growth rate (CAGR) of 11.03 percent through 20201 – is an effective alternative liquidity option for small and midsized enterprises (SMEs) that need fast access to cash.

Increasing Use of Factoring in Trade Finance

FCI, the global association for Factoring and Financing of Open Account Domestic and International Trade Receivables, defines factoring as an agreement between a factor and a seller, where the factor buys the seller’s outstanding invoices and ensures that if the buyer is unable to pay, the factor will pay the seller.2 International factoring involves sellers and buyers in different countries. Factoring is commonly used in trade finance by exporters to help accelerate their cash flow.3

Most recent global statistics gathered by FCI show that factoring continues to grow. The worldwide factoring market reached 2.376 billion euros ($2.68 billion) in 2016, a slight increase from 2.367 billion euros ($2.67 billion) in 2015.4 FCI collects statistics for factoring volume on a yearly basis from approximately 390 members in 90 countries.

The numbers, however, vary from country to county. While the domestic factoring market in the U.S. increased by 3 percent, the overall North American market recorded a decrease of more than 5 percent when including factoring for international trade financing due to reduction of volume related to China. FCI said factoring in China declined by 14 percent, affecting international figures of trade counterparty countries like the U.S.

European markets showed an increase in factoring volume averaging close to 2.5 percent. Some “mature” markets experienced a stronger upward trend, including Italy (10 percent) France (8 percent), and Germany (4 percent), while Turkey’s reduced exports contributed to a decline of 10 percent. Additionally, Russian volume increased by 20 percent and the Dutch by 26 percent.

In South America, factoring volume grew by more than 20 percent. Brazil performed best with a 50 percent increase, followed by Argentina (22 percent), Mexico (17 percent), and Chile (12 percent). According to FCI, the factoring market in this region “looks promising and expectations are high.”

Meanwhile, Africa showed an increase of 9 percent but it remains very dependent on the South African market, the report found.

Other data released by the EU Federation for Factoring and Commercial Finance (EUF) shows that the total turnover for the factoring and commercial finance industry across the EU in 2016 was 1.5 trillion euros ($1.7 trillion).5 Factoring is playing a critical role in “providing principally SME businesses with much needed working capital,” EUF said in a 2017 report, adding that nearly 200 billion euros ($226 billion) of funding is currently supporting approximately 180,000 European businesses.6

What’s Next for the Factoring Market

Global supply chain finance has yet to reach its full growth potential, according to the World Supply Chain Finance Report 2017.7 Larger suppliers are more willing to use factoring – which was traditionally used by SMEs – to “improve their balance sheet and cut risks,” the report said. However, the report suggests that few multinational corporations will turn to supply chain finance. Suppliers to large corporates are often established businesses themselves that don’t need the temporary added liquidity, and “therefore there is a lack of impetus for them to adopt the approach.”

SMEs, though, may see increasing opportunity for cross-border trade finance. Factoring involves standard documents that allow many partners to get involved. In such scenarios, an exporter can sell its receivables to a factor, which can then contact other factors in different countries to collect what was owed to the exporter.8 In the first four months of 2017 there was a 3 percent increase in cross-border factoring volumes, suggesting that “hard times are over and that this sector will return to positive territory this year,” according to FCI.

Data from the EUF shows that factoring volume in Europe has reached 10.1 percent of global EU gross domestic product (GDP). However, the EU factoring market is highly concentrated, with five countries – the U.K., France, Germany, Italy, and Spain – representing nearly 80 percent of the total market.9 The EUF believes that factoring could grow faster with improved regulation. Regulation is inconsistent across the globe. While some countries have local bank and factoring regulations, other countries are not regulated at all. There needs to be a better understanding of the differences between traditional bank lending and factoring – potentially as part of a factoring regulatory framework.

“It’s great news for the Industry to be able to support so many European businesses in their development,” EUF chairman Erik Timmermans said in a statement. “It’s again critical that legislators and regulators recognize this industry is a key contributor to wealth creation.”10

The Takeaway

Growth statistics show that factoring and supply chain finance are becoming increasingly important in funding not only SMEs, but also larger companies looking for alternatives. Further, factoring is playing a bigger role in cross-border trade finance, where businesses in developed economies often are providing liquidity to those in emerging markets. It remains to be seen how regulatory issues will unfold around factoring as it continues to grow.

Elena Malykhina - The Author

The Author

Elena Malykhina

Elena Malykhina is professional writer who has covered science, technology and business for more than 10 years. Her work has appeared in InformationWeek, Scientific American, Newsday, The Wall Street Journal and Adweek, as well as through the Associated Press.

Sources

1.Global Factoring Market 2016-2020,,Technavio; https://www.technavio.com/report/global-miscellaneous-factoring-market
2.“About factoring,” FCI; https://fci.nl/en/about-factoring/index
3.“What is factoring?,” Euromoney Trade Finance; https://tradefinanceanalytics.com/what-is-factoring
4.“2016 Global Factoring Statistics,” FCI; https://fci.nl/en/news/2016 Global Factoring Statistics/4147
5.“Factoring turnover in EU,” EU Federation for Factoring and Commercial Finance; https://euf.eu.com/facts-and-figures/factoring-turnover-in-eu.html
6.“Factoring and Commercial Finance Grows Again,” EU Federation for Factoring and Commercial Finance; “Factoring and Commercial Finance Grows Again,” EU Federation for Factoring and Commercial Finance;
7.World Supply Chain Finance Report 2017, BCR; https://gallery.mailchimp.com/dda7f8569e6895affb631c56b/files/b3edea83-1fa0-4f76-b4b5-3f7f65431b6e/WSCFR17.02.pdf
8.“Cross-border factoring,” Financial Dictionary; http://financial-dictionary.thefreedictionary.com/Cross-border+factoring
9.“April 2017 Newsletter,” EU Federation for Factoring and Commercial Finance; https://euf.eu.com/newsletter.html?download=367
10.“Factoring and Commercial Finance Grows Again,” EU Federation for Factoring and Commercial Finance; https://euf.eu.com/category/9-news-articles.html?download=372

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