Business growth is rolling on and the exchequer is benefiting in no small way.
The ability of firms to grow has increasingly been boosted by alternative sources of finance, mainly based on sales invoice financing called factoring.
Financing factoring lenders offer up to 90% cash against sales invoices and take on the task of collecting from customers, for a small fee.
This gives the small business enough cash to keep growing its sales at a fast pace. The EU Federation for Factoring and Commercial Finance recently collated first half year’s turnover results for the factoring market, representing 97% of the European market.
Factoring turnover in the first half of 2017 for EU countries exceeded €776bn, an outstanding year on year increase of 9%.
In Ireland, turnover in factoring reached €1.5bn with a surge of 19% in the third quarter of last year, confirming factoring is now perceived by Irish companies as one of their main sources of funding.
One reason for the growth in factoring has been the arrival into the Irish small business landscape of the Strategic Banking Corporation of Ireland (SBCI).
The SBCI began lending through a number of non-bank partners in 2015 with the goal of promoting competition in the SME lending market and reducing the cost of credit for SMEs.
The SBCI has made a significant impact since its launch with over 12, 593 loans issued, representing €544m in new lending by the end of 2016, about 9% of total lending for SMEs. Estimates for 2017 indicate growth continued through last year. Much of its funding has gone to financing factoring institutions.
The shift towards a more pro-growth orientation is a major change from the crises year when SMEs were seeking loans to cover the deterioration in trading conditions and support balance sheet restructuring.
In 2012, 40% of credit applications from SMEs were for stressed reasons, which include revenue declines, increased bad debts, or a slowdown in debtor collection. By 2016, this figure had dropped to 13%.
However, there may be trouble ahead. For small businesses trading to the UK, the spectre of a Brexit-driven rise in insolvencies in the British market could create major finance difficulties again.
The international credit insurance agency Euler Hermes in its Insolvency Index for 2018 has ranked the UK as one of the worst with a forecast increase in insolvencies of 5% in the coming year, compared to a 5% decrease in insolvencies in Ireland and 1% globally.
As the UK is the most frequently used by small businesses and where they most frequently use factoring to support their sales, this higher risk of insolvency will create problems.
Many factoring companies provide complete financial packages that combine, financing, debt collection, credit insurance and cash management expertise.
Demand for these services has increased as a greater number of good, credit-worthy customers turn to factoring to avoid the expense and burdensome paperwork associated with letters of credit.
If credit worthiness of UK customers deteriorates, then we can expect cost on factoring and related credit insurance to increase.
The French Association of Specialist Financial Companies (ASF) have called on the EU to intervene to prevent the risk of destabilising and contagion created by Brexit.
Requesting that French and EU authorities tackle the consequences flowing from Brexit in the governance in the financial area following the withdrawal of the European passport and the relocation of the European Banking Authority to within the EU.
The UK is the second largest market globally for the alternative finance/factoring industry, behind China and ahead of France.
But the EU accounts for almost two thirds of global factoring finance. There is a symbiotic relationship between SME financial health and a supportive alternative financing and factoring industry, which the EU must ensure, is not damaged by Brexit.
John Whelan is a leading consultant in Irish and international trade.
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