Sizing the Reverse Factoring Market

Enrico Camerinelli, Senior Analyst EMEA, Aite Group and Emmanouil Schizas, Senior Economic Analyst, ACCA (the Association of Chartered Certified Accountants) recently conducted a business case study for supply chain finance. In February 2014, ACCA’s Global Forum for SMEs noted the potential for further innovation in the sector, which currently makes up only 4% of the global receivables financing market (ACCA 2014).

This report addresses a number of areas, including providing a checklist for supply chain finance programs to the costs to set up a reverse factoring program (both one time and recurring, which I think they underestimated by not including accounting and underestimating legal costs, but that’s another issue).

There is good food for thought in the report, but one of the things I thought particularly interesting was their sizing of the reverse factoring market. I have tried before to set up league table around the size of Reverse Factoring (see No Supply Chain Finance League Table Hinders Market) and found most banks do not want to lift their kimonos (probably due to the fact that a few large banks control most of the share).

Enrico used two calculation methods to size the market which provided very similar results. He estimated the market size for reverse factoring between US$255 billion and US$280 billion.

Method I extracted the payables from the annual financial filings of industries that are intensive users of SCF (Auto, Pharma, Retail, Telecom, Consumer Packaged Goods, Chemicals) and then used industry experts to estimate percent of payables financed via reverse factoring.

Method 2 was a bit more of a stretch but led to a similar result. I will quote, “Each firm’s DPO was calculated and than a calculation was performed to estimate how much the firm’s DPO exceeded the threshold limit accepted by suppliers before the delayed payment becomes a concern. The values of payments exceeding such accepted limits represent the opportunity to use reverse factoring to support financially distressed suppliers.”

The interviews with expert panelists allowed Aite Group to assess the estimated total outstanding payables (ie value of A/P currently financed via reverse factoring) per sector.

While figures are ballpark, they concur directionally with my own analysis and with a few other industry experts. I actually had $275 billion back in 2012, but believe the numbers have grown to well over $300 billion given the rapid growth of these programs, both extending programs within subsidiaries of large multinationals as well as new regions or trade flows that are targeted.

I have also attempted to size the actual dynamic discounting market running through platforms. The sense is this market will take over the Reverse factoring market.

All in all, the overall size of this form of finance is still relatively small compared to the overall market for Trade Payables. There certainly is a lot of innovation occurring in the market as we move to One-Click finance (Tungsten, Nipendo, Taulia, Tradeshift, etc.) but we are still early days.

Given the interest in the venture capital and private equity world around funding vendors with finance apps, it would be a good to get more transparency here.

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