Insight & Analysis

Tight credit market pushes businesses towards factoring

Published: Aug 2023

Difficulties obtaining traditional funding are encouraging a growing number of companies to avail of factoring to increase their financial flexibility and reduce risk.

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The 2022 market survey published by FCI, the global representative body for factoring, shows factoring and receivables finance volumes increased by more than 18% last year to over €3.6trn.

A recent research report suggested the invoice factoring market alone would be worth in excess of US$6trn by 2032, boosted by increased open account trading and importers in industrialised nations considering factoring as a viable alternative to traditional forms of trade financing.

According to Dun & Bradstreet, the ‘cost of doing business’ crisis has meant many organisations are considering debt factoring as a viable option for the first time. Borehole Solutions Group, a provider of geotechnical drilling solutions has been using factoring for the last nine years, although Phil Rodgman, Group Financial Director says interest has risen since traditional banks stopped offering overdrafts as a facility.

“We operate in the construction sector and when you are working for principal contractors, as it goes down the supply chain the time it takes to get paid gets longer and longer,” he explains. “We got to a point where we were running out of money because we were owed more than what we had in the bank.”

Having looked at alternatives, the company started using factoring in 2014. “We have used quite a few providers over that time and have normally got the limits we needed, because when you sit down with a provider and they do an audit of your turnover, they typically come at a level to suit the funding you need by looking at your financials,” says Rodgman.

According to Derek Ryan, UK Managing Director of Bibby Financial Services, demand has risen strongly this year with a 30-40% increase in new business each month.

“There is now a greater demand from businesses looking to switch back to existing finance offerings,” he says, adding that business is split between recourse and non-recourse factoring. “With non-recourse factoring, the client benefits from bad debt protection which protects both their business and the lender in the event of a customer non-payment. However, for businesses that do not require bad debt protection, recourse factoring is the best option.”

Gladys Teale, Client Relations Director for factoring at Crédit Agricole Leasing & Factoring refers to factoring as complementary to leveraged buyout financing, providing more flexibility to the banking pool and allowing capacity to be reallocated to the balance sheet and/or specific lines.

“It improves balance sheet optimisation and protection against the risk of default by assigned debtors, enabling clients to optimise their credit risk management,” she says. “Factoring also makes it possible for specialists to monitor the client’s receivable accounts with the aim of optimising processes and ultimately generating cash gain.”

Large corporates often monetise receivables across multiple structured financing products, not only for risk mitigation purposes but mainly for off balance sheet items. Some of the structured receivables solutions used by such corporates include distribution finance and credit insured account receivable financing, which mostly works as securitisation structures.

“For small and medium sized businesses, the main driver to monetise receivables is to manage liquidity needs rather than off balance sheet items,” explains Sanjeev Ganjoo, Global Head of Trade Receivable Finance and CCB Trade Products at Citi. “Another key differentiator is the pricing of these different solutions. Typically factors charge much higher spreads to small and medium sized businesses as they have limited access to large international banks for these types of credit facilities.”

In addition to securing themselves against client default risk, companies are using factoring as a flexible financing option for working capital purposes or to support their suppliers adds Aurélien Viry, CEO of Société Générale factoring.

“Small businesses use it to outsource collection processes while multinationals appreciate the flexibility of having one single programme negotiated centrally covering subsidiaries in different countries using multiple currencies,” he says.

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