Central and Eastern Europe is becoming a hot destination for
invoice discounting and factoring. But there is masses of room for
growth, despite not all required legislation being in place.
Invoice discounting and factoring are not only massive growth
sectors in the UK and Western Europe during these times of
tightened liquidity, but they are also becoming increasingly
popular in Central and Eastern Europe.
Go deeper with GlobalData
This appears to be happening in two ways. Firstly, Eastern
European economies, depending on how supportive their legal
infrastructures, are taking up these products because they “provide
increased levels of liquidity and are available to companies
without traditional forms of finance”, Kate Sharp, CEO at the Asset
Based Finance Association (ABFA), says.
This is particularly useful for a lot of startup companies in
developing economies which are considered too risky by the major
banks. Invoice financing, which includes both factoring and invoice
discounting, provides these markets with flexible lending tools
that help develop the economy.
Growing
According to Eleni Bdoi, an economist at Banca Comerciala
Romama: “Invoice discounting is growing because our clients need
the financing for their internal transactions. The financing of
companies’ receivables against the presentation of their invoice
and other documentation helps them manage debt and growth.”
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataSecondly, as in all finance sectors, the saturation of invoice
finance in Western European and US markets has pushed companies to
move into developing markets. As these markets have fairly immature
invoice discounting facilities, they therefore offer a greater
growth potential of an average of 30 per cent per annum, according
to Sharp. In comparison, the UK recorded 12 per cent, France 9.1
per cent and Belgium 3.7 per cent for the same period, ABFA
statistics show.
Nevertheless, the Eastern European markets is still small.
Romania recorded a turnover of €550m and the Czech Republic €2.8bn
for 2005 compared to the UK which recorded €209bn for the same
period. The more mature CEE market of Poland, however, recorded a
high turnover of €3.7bn in the invoice discounting and factoring
sector for 2005, but also had a lower than average growth rate for
the region of about four per cent.
The stigma as ‘lender of last resort’ with which invoice
discounting and factoring used to be coloured has disappeared
because of its burgeoning role in helping the developing world and
western economies during times of tightening credit
availability.
Between 1998 and 2003, the Czech Republic and Poland recorded
300 per cent growth, Hungary 900 per cent growth and the Baltic
states of Estonia, Latvia and Lithuania over 950 per cent growth,
according to World Bank statistics.
Russia
Russia has been one of the most outstanding Eastern European
countries in terms of growth in factoring, registering a rate of
100 per cent year-on-year, according to the Russian National
Factoring Company.
“This is because the market is only young. Factoring
companies have also carried out promotion campaigns and now
companies are more informed about this kind of service, so there
has been more up-take of it. Previously they didn’t know anything
about it,” Ella Skaletskaya, deputy chairman of the National
Factoring Company, says.
Factoring companies in Russia are generally a department of
banks or large financial groups, and there are around 15 in total
across Russia.
On the other hand, although factoring and invoice discounting
generally go hand-in-hand in terms of market penetration, invoice
discounting is not present in Russia yet.
“It is a complex financial instrument and there has not been
enough information for managers of factoring companies to take-up
this product yet,” Skaletskaya says.
“But the National Factoring Company will launch it either at the
end of this year, or early next year.”
The rate of growth and each market’s ability to take up the
product across Europe is determined by their respective legal and
regulatory environment, Sharp says. This also applies to the
difference in growth rates across Western Europe.
Germany
For example, the German invoice financing market forbids
recourse facilities. This means that the company requiring invoice
discounting has to make an outright purchase and take out separate
insurance or some kind of bad debt protection in case the debtor
fails to pay. It is not able to get recourse in case of default
through the invoice discount agreement.
“In the UK if you want an ID facility, then you can choose to
have bad debt protection added onto your facility. This includes
selling the invoice to an invoice discounter provider and saying to
them whether you want to pay a premium to your insurance that
covers you in insolvency…so that if the customer fails to pay the
invoice discounter or factor sell you back your invoice and you are
obliged to buy it from them. Whereas in Germany you can’t do that,”
Sharp says.
ABFA charts the degree of difficulty – on a scale that ranges
from two to 13 – involved in setting up invoice discounting and
factoring facilities in different markets. It rates Germany as 11,
making it one of the hardest markets to enter. This assessment
takes into account legal requirements, transfer of receivables,
client insolvency priority rights for recourse and non-recourse,
and whether third party rights affect receivables.
Meanwhile, Sharp says, Romania, Slovenia, Estonia and Hungary
have supportive legal environments, which is reflected in their
respective ratings of four, six, two and six. Lithuania and Turkey
also have good ratings of four and six respectively, which explains
their respective rapid growth rate of 57 per cent and 49 per cent
for 2005, according to ABFA statistics. Similarly Romania recorded
30 per cent growth rate and Hungary 32 per cent, for the same
period.
The hardest market is Poland which is rated at 13. This is
reflected in its relatively low growth rate of 4 per cent. Russia,
however, lacks some of the important pillars of legislation for
factoring, and does not, as yet, have any legislation relating to
invoice discounting, Skaletskaya says.
