When the economic crisis was at its lowest point, there was great emphasis on the need for alternatives to traditional banking supports. Factoring, also known as invoice finance, was seen as one of the principle alternative financial intermediaries, offering a funding source for cash-strapped businesses by agreeing to pay the company up front the value of their sales invoice less a discount for commission and fees.
Recent statistics released by the Asset Based Finance Association(ABFA), which covers the UK and Ireland, reports “the total amount of lending UK businesses secured through invoice finance has passed the £20bn barrier for the first time, hitting a record £20.3bn this year, up 5% from £19.3bn last year”.
However, the ABFA stats also show that there has been no such growth in use of Factoring on the Irish market.
Funding advances to Irish business by factoring intermediaries has fallen 30% since the start of the global financial crises in 2008, whereas in the UK factoring has grown 34%.
The number of factoring intermediaries offering services in Ireland is perhaps one of the root causes for the lack of take up.
In 2008, there were eight organisations offering factoring in Ireland. This is now down to five main players with Anglo Irish Bank and National Irish Bank having departed the market. Whereas in the UK there are 45 factoring organisations according to the ABFA.
In Ireland, the fall-off in usage has been across the board with big business’ take up of factoring falling as well as small business users.
However, the drop in usage by small business will be of most concern to the Government who will look at the fall of 47% since 2007 as a worrying indicator that their efforts to get SMEs to diversify their funding needs has not been working .
This will no doubt be one of the reasons that the Government’s Strategic Banking Corporation of Ireland (SBCI) in July launched a new round of funding into Bibby Financial Services Ireland (BFSI) which has been trying to drive take-up of factoring as an alternative financing source for Irish SMEs.
Of course, the factoring market between Ireland and the UK as well as across Europe operates under EU free trade agreements, hence there is some business being written by overseas companies to support the Irish market and may not be reflected in the ABFA statistics.
However, other than Close Brothers Commercial Finance which has offices across Ireland and is part of Close Brothers Group plc, a leading UK merchant banking group, there is little evidence of other UK or European factoring or invoice discounting organisations offering any services of note into the Irish market.
The UK is the second largest market for factoring behind China which is now the largest factoring market in the world.
As a region, Europe remains the largest factoring market on the globe accounting for more than 60% of the total €3tr factoring volume globally as of the end of 2013.
In 2007, Asia recorded 13% of total factoring volume. As of 2013 its market share more than doubled to 27%.
It should be no surprise that China represents the largest portion of Asia’s total volume, followed by Japan and then Taiwan. For many businesses, one of the most appealing benefits of factoring is the ability to enter overseas markets which would otherwise pose too great a strain on their cash flow and the risk of non-payment.
In most countries, the growth in factoring has also arisen as a result of global competition, with businesses now less apt to demand payment at the date of or within a short time of delivery.
In fact, firms are offering their customers increasingly attractive trade credit conditions. As a result, firms have a greater volume of account receivables (sales invoices) to use for financing.
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