European invoice financing volumes have grown dramatically in recent years on the back of the credit crunch and impending regulation, according to new research by Demica, a working capital solutions provider.
With the invoice finance market in Europe growing at a compound rate of 10% since 2009, funding methods outside the bank lending channels are becoming ever more popular as a means to boost liquidity (see chart below). In 2011 the market was worth over €1 trillion as businesses turned to finance instruments such as invoice financing, supply chain finance, asset-based lending and trade receivables securitisation in the aftermath of 2008.
There are a number of factors driving this development, says Christopher Hawes, Corporate Director of Invoice Finance at RBS. For starters, “Banks are encouraging borrowers down this route because invoice finance requires them to set aside less capital; and with Basel III on the horizon, banks are looking to become more efficient with the use of capital whilst still supporting new and existing customers.” Also, by pursuing receivables-based finance, they can substantially mitigate lending risk which means that banks are often far more positive towards receivables or asset based lending proposals.
But it’s not a simply a push from the banks. Invoice financing allows businesses to access immediate sources of funding – often within a 24 hour period – while tidying up the balance sheet at the same time. “Corporates live and die on their cash flows,” says Phillip Kerle, Chief Executive of Demica. “They are looking at assets on their balance sheet as a means to boost their cash flows – and receivables are one of the largest assets they have.”
There was once a time when businesses concentrated on earnings. But now it is all about securing adequate levels of liquidity. Invoice discounting and trade receivables securitisation, then, have emerged as a “very sensible way to maximise working capital,” the report observes.
Another factor behind the market’s recent success is the relative speed and ease by which invoice financing can be secured. Compared to traditional loans, there are fewer financial covenants to surmount – a definite advantage if companies are seeking to access cash immediately.
Indeed, underlying this recent uptake has been a reassessment of traditional attitudes to invoice financing. As larger corporates utilise invoice financing, it is becoming more ‘acceptable’ in the market. Take factoring for example; once stigmatised as a lending of last resort, it has now become the first choice for many businesses that are growing rapidly. All this bodes well for the future growth of the market.
Demica’s report offers some telling insights: the €1 trillion figure, for example, accounts for some 8% of the European Union’s GDP. But it also makes up a mere 8.4% of total corporate bank lending, suggesting that it remains relatively small compared to more traditional forms of finance.
But don’t let size fool you; it’s what you do with it that counts.