Is Digital Finance Impacting Global Factoring Volumes (Yet)?

Factors Chain International (“FCI”) collects data from its members via surveys to estimate factoring volumes.  According to FCI, members account for 62% of global factoring volume.  Its 2017 survey estimated factoring amounts at  2,472 billion euro, which represents a growth of 4% over 2016.  Sure, its a survey, not audited numbers, and it’s directional, but it’s the best we got.

There were some markets that exhibited strong growth (European markets grew by 7%, albeit with the caveat of currency issues with UK numbers), and volumes in South America grew by 9% thanks to Brazil and Argentina.

The North American market figures are reported to be declining and both Canada and the USA aggregated figures are at -3.  Asia declined once again by -4%. This was influenced by the decline in China and by the results of other traditional strong players such as Japan (-25%).

So in a nutshell, if we are to believe the directional estimates, some regions are up, others are down, with no real understanding of causation.  For those markets that are down, specifically in North America, a working hypothesis is that early pay finance initiatives are starting to take hold.  Various SCF, business network, and purchase to pay vendors have developed transactional finance solutions for large buyers and their supplier ecosystems, providing easy-to-access digital financial services.

The question is – are we there yet?  But first, lets look to why early pay and digital finance has appeal compared to traditional seller based factoring.

Traditional Factoring versus Digital Lending Model

In factoring, the Factor undertakes credit management and collection of its clients’ book debts whereas with invoice discounting, a business collects its’ own book debts.  Typically the receivables are assigned to the factor, and notice of assignment is served on the buyers – by way of an introductory letter, assignment clause on all invoices, and statement of accounts from the factor.

Factoring offers a few key services to the seller:

  • Finance
  • Ledger management relating to the receivables
  • Collection of receivables
  • Credit cover against default by the buyers

It is a relationship and operation intensive business that is focused on small to mid market companies.

Digital Lending

Thanks to integration of P2P, S2P and E-invoicing platforms with buyers and suppliers, digital lending and third party early payment services have an advantage over traditional methods of financing suppliers like factoring or invoice discounting as many operational costs are eliminated and credit insurance is typically not needed.  So for example, ledger management relating to the receivables, receivables collection, and credit cover against default by the buyers are costs that can be avoided, giving early pay programs advantages in financing suppliers.  In addition, factors finance 75% to 90% of the invoice value to manage dilution risk.

What gives EPF or digital lending a big leg up is that they are basing decisions on an Approved invoice from the buyer.

Global Business Intelligence’s Study into Early Pay use

Back in the Fall of 2016, Global Business Intelligence conducted research with North American middle market companies to assess how material various Early Pay Finance techniques were relative to existing liquidity and working capital options.  So these were NOT companies that consultants and analysts like to call “long-tail”, implying small companies, but rather companies in the 50M to 1Bn sales segment.

These companies come from all walks of life – from environmental service companies, to staffing and BPO providers to manufacturers of all types of products, to those that forge and form metals. Most of these middle market companies sell a significant percentage of their goods and or services to OEM and large enterprise customers.  Many of these larger enterprises have offered various techniques to receive early payment.

While many of their customers have developed transactional finance solutions via supply chain finance, C2FO, dynamic discounting, digital lending, commercial cards, etc., the displacement of existing capital options for the middle market is unlikely.  What has been taking place is an option for liquidity at specific times (ie, window dressing periods), or selective use of techniques such as supply chain finance with key customers.  If you are interested in learning more about the study, contact me at dgustin@globalbanking.com

I will be on a panel at Lendit FinTech USA 2018 in San Francisco April 9th talking about Digital Lending & Invoice Finance along with George Shapiro, chairman The Interface Financial Group and Andrew Jesse of Tradeshift.  If you use the code below (LENDITSPEAKERVIP), you save 15% on your entrance fee.

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