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A win-win form of funding; financing economic growth while ensuring financial stability

Factoring and its variants have historically been used principally by SMEs and increasingly the benefits are being enjoyed by mid and large corporates. The EUF’s research indicates that the user structure is as below; by number of users, SMEs completely dominate, but by funding utilisation (advances), large corporates are significantly the major party.

The most popular sectors for users are key real economy sectors: Manufacturing, Services and Distribution, representing around two thirds of number and about three quarters of value.

Factoring Benefits

For SMEs the benefits include

  • A source of working capital that doesn’t require an established business or significant other assets, the level of funding available is directly proportional to the level of sales the business makes and the debt outstanding. This means that unlike traditional funding, the facility usage does not need to be renegotiated in times of growth.
  • The opportunity to outsource the labour intensive administrative functions outsourcing of collection and sales ledger management.
  • The opportunity to separate sales relationships from collection activities
  • A form of funding that usually provides a higher level of finance than traditional lending and does not usually require extra security or collateral
  • The opportunity to protect against bad debt. 

For large corporates and multinationals

  • The same finance and outsourcing benefits as for SMES are enjoyed. 
  • For large businesses, the finance is generally offered with fewer operating and performance conditions (covenants) compared to other forms of funding. It also gives the opportunity to link to more extensive Asset Based Lending, where other assets of the business are also included and contribute to the finance package. 
  • Not based on Balance Sheet strength, but on current performance. 
  • It can raise more working capital than traditional lending approaches.
  • In some environments, it can be used to improve the Return on Asset/ Equity Ratios (ROA/E)
  • The opportunity to protect against bad debt.
  • It can help support Restructuring, Merger and Acquisition activity. 

For Factoring and Commercial Finance Providers

  • Factoring solutions allow the Factor to advance relatively more funds, more securely than a traditional lending product. 
  • Factoring and Invoice Finance is a low loss given default solution; this improves returns, supports competitive pricing and can reduce the Factor’s cost of capital. 
  • The EU Federation’s White Paper shows that the losses are around four times lower than traditional financing loan products.

All stakeholders benefit from the unique characteristics of this solution.

A stability focused financing tool

Because of its secured and monitored status, Factoring is a very stable low loss given default financing solution, which makes it an important offering in the funding of the real economy in both growth and recessionary periods of the economic cycle.

The EUF’s 2015 Whitepaper undertook large scale analysis of the European factoring market and compared the loss provisioning performance with that of the traditional lending industry as recorded by the ECB.

In both the stronger and weaker EU countries, factoring consistently performed better, with the performance being around four times better than other forms of working capital funding. 

Loss rates in factoring in 2014 averaged 0.26% of advances with a median 0.09%; loss rates in comparable bank lending in 2013 were 0.96%.

The proportion of Industry client turnover provided for was 0.042%. To put this in context, the distance between Brussels and Strasbourg is approximately 350Km. If one imagines the Industry turnover spread out over this distance, the losses represent 150m.