The invoice finance
market is picking up as a result of the recession.
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Invoice finance has traditionally been
considered as a separate entity from leasing. However a culture
shift in the past few years has seen companies such as France’s
Crédit Agricole merge their leasing and
factoring divisions to reveal areas of common ground for
lessors and invoice financiers.
But how has invoice finance developed in the
past few years across Europe?
Invoice finance is a sub-form of commercial
finance, itself differentiated between factoring and invoice
discounting, is used by business in need of immediate cash and is
complementary to a loan, or an overdraft (see glossary,
right, for definitions).
With factoring and invoice discounting,
companies sell accounts receivables to another company for a
discounted price, in order to gain immediate cashflow. With
factoring, they need to give away the details of their customers to
the service provider, be it a bank-owned or an independent
business. Normally, the charge for the service is between 0.5% and
3.5%.
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By GlobalDataLike leasing, invoice finance is inherently
linked to SMEs. As such, it is a “mirror of the economy of the UK
and around”, says Maurice Craft, chairman of the UK’s Asset Based Finance Association
(ABFA).
Talking about the development of invoice
financing in the UK during the past few years, Craft said: “There
was a big shift in 2007 and 2008, when the economy was beginning to
dip.
“Lots of pressure brought on the banks by the
financial crisis led them to reduce the amount of money they were
lending to SME businesses by way of overdraft. At that time there
was a shift from traditional forms of lending into the asset-based
finance industry.”
Factoring on the rise
Combined figures from the European Federation of Factoring and
Commercial Finance (EUF), the umbrella organisation for
Europe’s factoring associations, have shown a trend across the
continent which more or less reflects the situation in the UK.
After uninterrupted growth in previous years,
Europe’s factoring dropped in 2008 and 2009. Last year’s turnover
was €827bn, a 1.8% decrease from 2008, and representing 6.5% of the
EU’s GDP.
According to figures released by ABFA, the UK
factoring industry is picking up again this year after the fall
recorded in 2009, and the same is happening elsewhere in
Europe.
The UK remains Europe’s largest factoring
market, with a 24% market share and the likes of GE Commercial
Finance, Lloyds TSB Commercial Finance, Bibby Financial Services,
Close Invoice Finance and a few others dominating the market and
showing resilience to the downturn.
Bibby Financial Services (BFS), for instance,
has seen sustained growth. Its CEO David Robertson said that
despite having felt the impact of the downturn, the company saw a
24% growth in new business last year.
It also increased its client base and with an
increased market share of 8.1% in UK factoring, the invoice
financier is now supporting a “historically high number of small
and medium-sized firms across a variety of industry sectors”,
according to Robertson.
AnaCap-owned Absolute Invoice Finance is
another leading player in this segment, and last month signed a
string of deals with UK-based SMEs (see How invoice financing supports SME growth).
Popular with
manufacturers
Despite a number of industries turning to
invoice finance for their cash needs, figures from various
countries have shown a prevalence of the manufacturing sector as
the main customer base for invoice financiers.
ABFA figures show that the number of clients
using invoice finance was around 45,000 in the quarter ending 31
March 2010, with the manufacturing and distribution industries each
representing roughly 30% of that figure.
The predominance of the manufacturing sector
is confirmed elsewhere. In Spain, the manufacturing industry has a
25% market share. In Germany, the key industries for invoice
finance are the food nutrition industry, the manufacturing of metal
products and machine construction, electronics and electronic
elements, services, and manufacturing of chemical products.
Figures in the US show that the textile
industry alone holds 60% of invoice finance market share in that
country.
Despite the potentially large customer base,
the number of clients in absolute terms is seen as still low.
Glenn Blackman, a director at commercial
finance brokers Cashflow Acceleration Limited, said that the firms
using invoice finance represented only 0.73% of the total number of
UK businesses currently listed in Dun & Bradstreet’s
Marketplace of UK Businesses Database, representing a “low take-up
of invoice financing”.
To understand the reasons behind this,
Cashflow Acceleration Limited commissioned a piece of research
involving 100 SME-sized companies. The research revealed that
invoice financing was somewhat “distrusted” by SMEs because
companies preferred loans and overdrafts, but also because it was
not promoted enough.
Client numbers rise in
Germany
Alongside the low take up, other challenges
have emerged in most countries.
In Germany, according to UK-based commercial
finance brokers Hilton Baird, last year’s drop was linked to the
fact that all invoice finance facilities offered by German funders
are non-recourse and therefore, because access to credit lines was
dramatically reduced by the biggest insurers – Euler Hermes,
Atradius, Coface and Zurich – it was increasingly difficult for
businesses to access invoice finance.
This has been reflected in the fact the total
GDP penetration of the German factoring market is just 3.78%
compared to 6.44% in France, 7.77% in Italy, and 10.5% in the UK,
according to Hilton Baird.
However it is by no means all doom and gloom
in the German factoring market. The German Factoring Association
(Deutscher Factoring Verband) reported a staggering 47% rise in
client numbers between the first half of 2008 and the first half
2009, indicating the realisation of small business owners that
invoice finance is an ideal way to release cash to fund their
business as the economy returns to growth and to cope with an
increased demand.
It also demonstrates how funders have begun to
extend their offering to smaller clients in order to spread their
risk.
According to Hilton Baird, it is therefore the
responsibility of brokers to “ensure these businesses are put in
contact with the funder that is most able to satisfy each
individual business’ cash flow needs and growth plans over the
coming months and years.”
Longer payback times in
Italy
As far as Italy is concerned, Gianfranco
Antognoli, MD of Italy’s MPS Leasing & Factoring, said that
demand for factoring saw “differentiated trends” – including a
stable business between the end of 2009 and the beginning of 2010,
but also more firms looking for non-recourse factoring.
According to Antognoli, there has also been an
extension in the amount of time companies are paying back their
debts. In the past few months, MPS Leasing & Factoring has seen
an increase in the number of clients who have asked the lessor to
“assist their suppliers, from which they buy with longer payback
time”.
Antognoli said: “I am convinced that the
increase of non-recourse factoring is somewhat contingent. I don’t
know how long this crisis will last, but I expect that when it is
over, this phenomenon will be reduced, too. On the other hand, I
believe that the longer payback time is something structural.”
Where the economics make sense, invoice
finance continues to offer an innovative solution to help smooth
and improve cashflow. However there is still work to be done in
terms of reaching potential customers and reassuring them of the
benefits.
