Factoring, also known as accounts receivable finance, is an increasingly popular method of business finance, worldwide. With factoring, a business sells its debtors book to a third-party organisation. This unlocks working capital, allowing a business to expand more rapidly and offer more attractive credit terms to its clients without running the risk of cashflow problems. This is valuable for many businesses, especially so for SMEs. In fact, one key driver of the industry’s growth is that many central banks around the world have identified a direct correlation between factoring and SME’s access to capital – stimulating economic growth and creating jobs. Let’s take a look at the FCI’s latest research on how factoring is evolving worldwide:
As with economic growth, the factoring industry goes through cycles. A slowdown in 2015-2016 may have caused some concern, but this proved to be transient – 2018 saw a 6.49% global increase in volume, with positive trends in every region. The real proof is in its long-term resilience: over the past 20 years, the factoring industry has grown at nearly 10% per annum on a CAGR basis. In 1998, the global volume was €500 billion – at the end of 2018, it reached €2.76 trillion. Its global distribution has also widened – FCI, a global factoring network, reports that 20 years ago its membership was 100, with more than half from Western Europe. Today, it has over 400 members, with 25% from Asia and 50 members in emerging economies.
Africa’s factoring volume rose to €22.1 billion in 2018. While this represents relatively modest growth of 2%, the year also saw substantial developments, particularly in the legal and regulatory environment, that indicate huge expansion is afoot. In Egypt, following updated legislation, the factoring market grew 24% year-on-year. A government SME finance scheme was launched in Mauritius, with a focus on promoting factoring. OHADA, a treaty of 17 countries in Central and West Africa, pushed ahead with an act to enable factoring in all its member countries – set to take effect in October 2019. South Africa remains the dominant player, accounting for 80% of the continent’s volume.
Latin America and the Caribbean have seen an explosion of interest in alternative financing schemes. Traditional finance provided by banks relies on a high volume of transfers – which may disincentivise lending to SMEs. Despite their lower transfer volume, SMEs often have substantial financing requirements. Factoring, ideally suited to this context, is thus taking centre stage – and total volume for this region rose to €121 billion. Argentina and Chile saw the greatest increase, of 34% and 16%, respectively.
North East Asia
Now a giant in the industry, factoring in this region grew by 5%, to €581 billion, in 2018 – accounting for 21% of the global volume. China is the world’s largest single factoring market. The nature of its economy is transforming, from export-focused to consumer-led. As a result, international factoring has fallen – but domestic factoring continued to grow, favouring local suppliers. In Taiwan, meanwhile, many banks have transformed their factoring facilities to serve larger-scale companies. Both countries provide useful insight into the flexibility of factoring.
South & South East Asia
With China’s shift towards domestic sales, this region is seeing a boom in its exports to Europe and the United States – and export factoring is set to dramatically increase along with it. Thailand and the Philippines passed laws last year that promote factoring. Meanwhile, India has moved into the top 11 two-factor (export-focused) countries, while Singapore is in the top 3 – paving the way for surrounding regions to follow suit.
The EU is the world-leader in factoring, with a total volume now exceeding €1.7 trillion (66% of the global total), and an 8% increase year-on-year. This is the tenth consecutive year of expansion and establishes factoring as a vital economic tool for promoting businesses’ growth. As a factoring and economic superpower, it is not surprising that the EU has also seen the greatest levels of disruption, as digitisation has coincided with new types of customer relationships and international trade. While challenging to negotiate in the short-term, these are creating an abundance of new opportunities. How the EU responds to digitisation will likely influence the global factoring market – and the continued growth and evolution of the industry.
Think global, act local
Merchant Factors is an independent alternative financing company in South Africa. With more than 30 years of experience, it has stood the test of time: rising to the challenge of each global disruption and providing its clients with unparalleled service. It specialises in both local and cross-border finance and can tailor a factoring facility to suit the unique requirements of each business.
For fast, flexible business finance – contact Merchant Factors today
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