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Factoring & Invoice Discounting

Making Hay While the Sun isn’t Shining?

By CreditMan Tuesday, February 24, 2009

Factors in the UK and beyond are experiencing a tremendous increase in the level of enquiries from hard-pressed SMEs suffering cash flow problems in the current economic downturn. But while the sales leads are flooding in, factoring executives are not rubbing their hands together and grinning just yet.

This is because increased volumes do not necessarily mean increased profit – well not in a recession anyway. According to Michael Bickers, author of the recently published 12th edition of Factoring in the UK and editor of the World Factoring Yearbook, ‘during the last economic downturn in the early 90s, factors experienced a surge in business, but profits, for many, went into decline. This was because, although the level of business and enquiries was higher, the credit quality of clients and their customers – who owed money to the factors – decreased significantly, causing factors problems in collecting debt. In addition to this, client fraud levels shot up – and fraud is the factors worst enemy, sometimes wiping millions off the bottom line’.

Factors are now facing a similar situation in the current climate. However, they have the added problem of severely restricted credit insurance cover, making it much more difficult to offer non-recourse facilities. Some factors are also experiencing liquidity problems.

Bickers, however, believes that there may be ways that factors can avoid these problems and trade much more effectively in difficult times, such as ‘identifying key triggers for high risk scenarios, positive pricing strategies, working more closely with credit insurers and evaluating potential new markets’.

These, along with other issues designed to help factors retain and increase business, will be discussed in-depth at BCR Publishing’s forthcoming Receivables Finance International conference in London in March.

For factors and other counter cyclical industries these could be good times, but as in most turbulent environments, one has to tread carefully - after all, as every farmer knows, hay can burn very easily.

However, if factors get it right and with a little help from parent banks and central banks, factoring and other receivables finance products such as invoice discounting, asset based lending and supply chain finance, as alternatives to more traditional forms of lending could be seen as a far more appropriate forms of funding now. As a short-term asset of perhaps 50 or 60 days, a receivable has none of the difficulties for financiers of having to assess longer-term asset valuation. And there is no real need for a factor’s client to have any strength in its balance sheet, as the focus is on the strength of the client’s debtor. If the factor’s client has a reasonable spread of debtors in the sales ledger, risk can be relatively easily managed.

Banks, including central banks, need to look at this class of funding more closely, particularly in view of what’s happened in recent months. Indeed, even in the last downturn, the Bank of England said there was an over reliance on the bank overdraft and that alternative forms of funding, such as factoring, should be considered. Since then, factoring in the UK and in most other parts of the developed world has grown enormously – in the UK it is estimated to have reached over £200bn in volume in 2008. Despite these large figures, it is thought that only about 5% of trade receivables are financed externally (SCF Capital, 2008), suggesting that receivables finance is still very much under-utilised

If factors and trade receivables financiers can get to grips with some of the issues that are currently hindering growth, they could continue to move towards what could be a very bright future.


Factoring in the UK, 12th edition, £475; World Factoring Yearbook 2009, £140, published by BCR Publishing: Tel: 020 8466 6987

BCR Publishing’s 9th Receivables Finance International, factoring conference and exhibition, London Intercontinental Hotel, 19-20 March, Tel: 020 8466 6987, www.factorscan.com