Factoring

1. Industry Analysis

1.1 Industry history

Factoring services can be traced historically to Roman times. Traders in ancient Mesopotamia (modern-day Iraq, Kuwait and Syria) use a form of factoring in their business dealings. Factors arose in England as early as the thirteenth century, as commissioned merchants for manufactures in distant, unfamiliar markets.

               Factoring is a financing method in which a business owner sells accounts receivable at a discount to a third-party funding source to raise capital. In a typical factoring arrangement, the client makes a sale, delivers the product or service and generates an invoice. The factor (the funding source) buys the right to collect on that invoice by agreeing to pay you the invoice’s face value less a discount—typically 2 to 6 percent. The factor pays 75 percent to 80 percent of the face value immediately and forwards the remainder (less the discount) when your customer pays.

Global market overview

Preliminary world factoring statistics indicate that the Industry has overall held its pace with many markets showing significant continued growth. These advances have however been offset by a continued reduction of volume from China, where the downturn has also affected international figures of trade counterparty countries such as the USA – although in this case the reduction appears to have mitigated with an increase in domestic business, at least in respect of FCI Members.

Global Factoring Volumes by Region

Geographical segmentation and analysis of the factoring market includes;

  • Americas
  • APAC
  • EMEA

Industry dynamics

2016 GDP figures remain to be fully finalised and so it is a little premature to be able to state for sure the GDP penetration of the Industry; however, it seems unlikely that the figure of circa 3.8% measured for 2015 will be substantially different this year.

Advances against invoices were estimated to be in the order of EUR 360 billion at the end of the year – this figure is drawn from actual reported advances where they are available and from imputed average days outstanding calculations. Again, this is broadly the same as last year’s figure.

Industry driver and Trends

  • Improved inventory management through factoring business
  • Increasingly attractive trade credit conditions, such as interest-free account payables at longer maturities
  • International cross-border opportunity
  • Technological breakthroughs like Internet access and cloud-based platforms
  • Instant access to working capital without jumping through the hoops or dealing with the lengthy waits associated with getting a business loan
  • The effectiveness of factoring receivables technique
  • Factoring industry’s awareness of supply chain finance
  • Developing potential for increasing protectionism

Industry challenge

  • Lack of expansion opportunities in developing countries
  • Perception that financing through factoring companies typically costs more than financing through traditional lenders such as banks
  • Maintenance of flexibility to react quickly to changing market circumstances.

Common factoring terms

Discount rate or factoring fee

Advance rate

Reserve account

Long-term contracts and minimums

Notification vs. non-notification

Accounts receivable discounting

Specialized factoring

With advances in technology, some invoice factoring providers have adapted to specific industries. This often affects additional services offered by the factor in order to best adapt the factoring service to the needs of the business. An example of this includes a recruitment specialist factor offering payroll and back office support with the factoring facility; a wholesale or /distribution factor may not offer this additional service. These differences can affect the cost of the facility, the approach the factor takes when collecting credit, the administration services included in the facility and the maximum size of invoices which can be factored.

Real estate

Medical factoring

Construction

Trucking

 

 

 

2. Factoring and Commercial Finance Market Analysis

Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs.  Forfaiting is a factoring arrangement used in international trade finance by exporters who wish to sell their receivables to a forfaiter.  Factoring is commonly referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing. Accounts receivable financing is a term more accurately used to describe a form of asset based lending against accounts receivable.

Types of Factoring Facilities

There are three principal types of factoring facilities:

  • Maturity factoring.
  • Collection factoring.
  • Advance factoring.

Factoring Agreements

Factoring agreements are two-party agreements between the factor, as the purchaser of accounts, and its client, as the seller of accounts. They are variously called, for example, Factoring Agreement, Accounts Receivable Purchase Agreement, or Sale and Servicing Agreement. Factoring agreements cover a wide variety of legal and business issues, including:

Key Success Factors

  • Improved inventory management through factoring business
  • Improvement of trade growth globally, increasing influence of factoring operations.

Industry Size and Forecast

  • The global factoring market to grow at a CAGR of 11.03% during the period 2016-2020.
  • The market will grow steadily at a CAGR of greater than 13% by 2022.

Factoring Process

The factoring process can be broken up into two parts: the initial account setup and ongoing funding. Setting up a factoring account typically takes one to two weeks and involves submitting an application, a list of clients, an accounts receivable aging report and a sample invoice.

For the full market report please contact info@five4.co.uk for further details.

 

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