The Future for Factoring
Over the last couple of years, more and more businesses have seen the benefits of factoring. Year on year increases in factoring turnover in the EU illustrate this. Since 2003, EU factoring turnover has nearly trebled.Banks, too, are increasingly coming around to the idea of factoring. With a more stable economy, they are gaining confidence in financing small businesses. With a better economy comes lower risk and less money required on the bank’s behalf.
All of this means an increase in factoring practices, with more businesses and more banks involved. All of which adds up to increased turnover Europe-wide.
Factoring also provides tangible benefits in a wider economic sense. According to the EU Federation’s report, factoring supports 601,000 jobs in France, Italy, Germany and the United Kingdom. It further reports that, if factoring gained maximum support, could give rise to another 280,000 jobs.
- Factoring has, apart from the crash in 2008/09 seen year-on-year turnover increases since 2003, trebling in that time. This seems set to continue.
- More businesses and banks are seeing the benefits of factoring. Due to a more robust economy, banks are more open to lending. This means more money and growth for smaller businesses.
- Factoring already supports over 600,000 jobs in Europe. 280,000 more could follow by 2015.
Over the past half a decade or so, lending conditions – especially for smaller concerns – have been extremely harsh. Most SMEs have struggled to stay afloat, cut off from traditional forms of lending and many factoring companies only dealing with firms that generate a certain amount of income. This does not apply to all factoring firms, but a great deal of small and medium businesses have found it difficult to gain funding.
With economic conditions beginning to right themselves, but many banks still keeping the purse strings tightly closed, more and more factoring firms are looking to work with smaller businesses to access the financing they need to grow.
Factoring focuses on allowing businesses to use their invoice debts to gain quick, short-term financing. Increasingly, however, factoring firms are using different methods to help businesses access finance.
Popular Factoring Solutions
There are many different forms of factoring available on the financial market. Many of their functions overlap, with some very big, important differences as well.
Depending on economic conditions, various forms of factoring have fallen in and out of favour over the decades. Currently, there are seven types of factoring that see wide use across many different markets.
In this form, the factor (the institution lending the financing) provides the client with a raft of services, such as; managing the collection and administration of receivables; ‘credit protection’ against the debtor defaulting on their payment is optional and most importantly an advance payment on the value of the receivables offered up.
The factor gives protection against the debtor. If the debtor fails to pay, the consequences fall on the factor.
In this arrangement, the factor agrees to pay a certain portion of the receivables either on the date they are due, or on another date agreed between the two.
The client gives the factor its accounts receivable for a percentage of their collected value. However, the client does not have to hand over control of its sales ledger.
In recourse factoring, the risk of default by the debtor remains with the client, not the factor.
In this arrangement, the factor puts itself between a company and its suppliers. The factor strikes a deal the pay the company’s invoices. The factor agrees to do so quickly, in exchange for a discount on amount due.
Usually using two factors, international factoring alleviates exporting clients from the burden of collecting receivables internationally by providing advances against outstanding receivables. It offers the client accelerated financing and protection against loses in international markets.
Who Uses Factoring?
With the financial and business markets experiencing so much upheaval in the past half a decade or so, it is interesting to note the main users of factoring.
With the economic recovery now gaining steam, this helps reveal the markets and businesses most likely to use factoring moving ahead.
The 2013 report by the EU Federation of Factoring and Commercial Finance had some interesting insights into who used factoring the most to gain quick finance.
Small and medium-sized businesses largely praised factoring as a form of finance. Attaining finance streams from traditional sources has been, and continues to be, hard for businesses on the smaller end of the scale. Many banks are still wary of lending to what they see as high-risk concerns, with the debt crisis still firmly in mind. When they do lend, many banks have become increasingly strict with their checks and conditions.
- Small and Medium-sized business particularly find factoring useful in gaining finance withheld from them in other places.
- Factoring offers these businesses access to finance still not forthcoming from traditional lenders.
- According to the EU Federation’s report, the majority of factoring clients in the UK fell between the ‘Micro’ and ‘Small’ definitions, as defined by their turnover.
For these reasons, small and medium business will continue to be major uses of factoring financing for the foreseeable future.
Looking at the broader strokes, there are three particular markets that factoring is primed to help. The Manufacturing sector has great need for factoring, generating receivables that often come with staggered or delayed payment options.
The distribution market, working with many disparate suppliers, intermediaries and endpoint businesses. Working with a factoring company to deal with overdue receivables is an ideal solution.
The services market, likewise, can relieve itself of the burden of collection and fold the financing received into growth and day-to-day operations.
- The manufacturing, distribution and services sectors, in particular, make use of factoring.
- A source of financing that considers turnover, rather than collateral, is ideal for small and medium enterprises in these sectors.