Who can use factoring? Who offers the service?
Factoring and Commercial Finance can be an ideal source of working capital funding.
It is typically used by SMEs but in many markets increasingly it is now being utilised by mid and large corporate sellers (often in the form of invoice discounting and Asset Based Lending).
The potential range of users is very large and in many markets, there is significant opportunity for this kind of funding to grow in scale.
Across Europe, where it is well established, the Industry represents 10% of GDP; globally the figure is around 3.5% and rising. That’s €1.5Trillion turnover in Europe, €2.4Trillion in the world!
This does not mean that this form of finance is suitable for all businesses; for it to work well, the business must generally have some important characteristics:
- The seller offers goods or services that are straightforward and easily measurable; for example, 100 boxes of printing paper or 40 hours of someone’s time. Businesses which offer goods or services where completion and satisfaction are harder to define, or which are invoiced in stages, involve complex contracts or need third party involvement for completion are more difficult to support because of the increased risk of disputes; most Factors will not offer finance in these circumstances.
- The seller operates on open account terms; that is, the sales invoice is expected to be paid after an agreed period of credit, say 30 or 60 days. Invoices that are paid in advance or on delivery are not suitable for finance. In most markets, invoices that are payable after very long periods of credit, usually >90 days (after due date of the receivable) are not funded.
Most Factors will only finance business to business transactions.
Most providers offer full turnover agreements which fund all existing and future receivables, although some offer selective partial funding against particular buyers.
European Providers of Factoring are primarily Banks (40%) or specialized factoring subsidiaries of banks (40%) or independent commercial providers (20%).