Analysis
The Many Faces of Factoring in Europe
Russell Warner
Abstract With the recent expansion of tiie European Union and
Russell Warner is group
commercial director at growing optimism about an economic upturn, more and more companies
EUROFACTOR — an Euler are iooking to expand their businesses through cross border trading. For
Hermes and Credit Agricole those on mainiand Europe, there's the added advantage of a singie
Group company. Russell currency, but even without it, opportunities for UK businesses abound
i^as over ten years and many are turning to factoring to heip them finance their pians.
experience of providing
alternative firiancing for However, a recent survey by EUROFACTOR indicates that caution is stiii
growing busirtesses across needed when undertaldng a programme of cross border trading,
the UK. primariiy because each member state is stiii governed by independent
ruiing bodies and trading iegisiation that dictate each nation's appetite for
trading as weii as the specific terms and conditions with which trade
must compiy.
The resuit is a patchwork approach to factoring across Europe, with the
industry at varying stages of deveiopment and sophistication, and whiie
this need not hinder those companies determined to expand, it does
highlight the need to deveiop a thorough understanding of the trading
practices of those countries with whom they wish to trade and to choose
financiai partners with care.
Factoring is big news in the UK. According to the Factors and
Discounters' Association (FDA), the industry has seen a five foid
increase in turnover during the last decade, with more and more
businesses recognising the potential advantages associated with it when
compared to traditional financing options like the banks and venture
capitalists. And as the economy continues its steady upswing, stiii more
are looking to factoring to help them grow their businesses through cross
border trading with our European neighbours. But this assumes that
they are as cognisant and comfortable with this way of doing business as
we are and, as a recent survey shows, this is not necessarily the case.
The survey highlights the fact that whilst much of Europe is working
towards the common goal of a unified trading zone, through membership
of the EU, each member state is still governed by independent ruling
bodies, and trading legislation relating to the individual states still
dictates the nations' appetite for trading as well as the specific terms and
conditions with which trade must comply. In practical terms, our
European neighbours are all very different culturally; they have different
customs, speak different languages, operate in different time zones and
are generally very geographically spread. All these factors impact on the
way the iocal markets have developed and have helped shape the rules
and governing practices that form the basis of the factoring industry in
each nation.
In the UK, the industry is now highly sophisticated. It is an extremely
competitive market and while the banks and major financial institutions
28 Credit Control
Anaiysis
Still dominate the arena, the number of specialist and independent
providers is increasing. Furthemiore, the appeal of factoring is
stretching beyond the SMEs and new businesses that were traditionally
the core client base for factoring companies and is attracting larger,
more established organisations. These are increasingly recognising the
benefits of utilising debtors within their range of funding tools and using
asset based lending to secure acquisitions through leveraging the assets
on the balance sheet, so that today UK factoring houses are working
with clients to build new businesses, restructure existing ones,
turnaround failing companies and finance management buyouts.
Against this backdrop, perhaps the main distinguishing feature setting
i( Early UK factoring apart from its European counterparts is the dramatic growth
in the use of confidential invoice discounting as a means to obtain
perceptions of
working capital funding through receivables. This has been borne out of
invoice the fact that early perceptions of invoice discounting in the UK implied
discounting in that It was a last option for companies trying to resurrect their cash flow.
the UK implied
that it was a The rise of legislation
last opt ion for While perceptions have moved on, there remains a reluctance here for
companies companies to be seen to loosen control of their debt collection processes
trying to and it is this that has led to the demand for the proliferation of
resurrect confidential facilities that exist in the UK today.
their cash
However, this is at odds with practices across mainland Europe, where
flow. y•
the authorities take a much more pragmatic approach. Consequently, if
a factoring facility is not disclosed in Europe - and in France in
particular - the supplier will rank behind preferential creditors and
employment liabilities in terms of getting paid, making it a much higher
risk proposition than in the UK.
While the stringent legislation surrounding the use of factoring services is
kept up-to-date and relevant to the needs of modern factoring facilities in
France and Germany, elsewhere in Europe the rules are more outdated.
In Belgium, the relationship between customer and factoring company is
still determined by the Napoleonic code and law originally introduced in
1919 and only modified in 1958, while in Portugal it is governed by the
Civil Code and in Spain the "Real Decreto" is the governing legislation
relating to all financial institutions.
This lack of common legislation is likely to hinder the growth of a set of
standardised trading practices across the Euro-zone and represents an
interesting challenge to any factoring provider hoping to deliver a
Europe-wide service. The closest thing to this - and most effective
working solution - is to use a network of local providers that operate on
the ground and within the boundaries of local legal and fiscal structures.
It is not easy to build such a comprehensive and effective Europe-wide
team, but the industry has matured sufficiently over the past 20 years to
set up self-governing organisations to regulate itself and provide access
to quality networks of providers not just in Europe but worldwide. In the
UK, the UK Factoring Association and the FDA lead the industry. In the
International arena the International Factors Group and Factors Chain
International operate worldwide and the former have over 50 members in
over 35 different countries with the latter, operating a two factor system,
have 150 members across 53 countries.
Credit Controi 29
Anaiysis
State of the economy
The rise of factoring as a means to finance growth is closely linked to the
state of the economy and while most of Europe is gradually experiencing
an upturn in economic activity, levels of optimism about recovery vary
considerably. In February 2004, PricewaterhouseCoopers Global issued
a report predicting that "Euroland growth is expected to recover from
0.4% in 2003 to around 1.75% in 2004 and 2.25% In 2005 as the world
economy revives," but our survey highlights the fact that confidence in
this recovery varies from country to country, and this will impact on the
demand for factoring services across these nations. In Great Britain, for
example, where growth had already started to show some effects in the
second half of 2003, optimism is high and this is reflected in the level of
activity in financial markets.
Italy is also displaying confidence in her economic recovery, with Italian
companies benefiting from a strong upswing in exports. Spain and
i i Across Europe Belgium are optimistic too. Indeed, Spain has boasted some of the
trade highest growth rates in Europe over the past few years (+2.3% in 2003)
receivables and remains above the European average in her forecasts for 2004, and
account for even Germany, which was practically in recession in 2003 is showing
approximately signs of recovery.
one third of
companies' Portugal and France are demonstrating the greatest caution. Portugal is
still suffering from the impact of the government's policy of restraint and
balance
companies there remain conservative, while in France, companies,
sheets. y• which suffered from a significant business slowdown in 2003, are still
waiting to feel the effects of recovery.
Even so, it is clear that across Europe, trade receivables account for
approximately one third of companies' balance sheets and the great
majority of European companies do use external services to assist with
the process of managing their receivables. But the role of factoring in
this process varies considerably, with Spain using the facility the most
(15%) and Belgium the least (3%). Elsewhere, factoring accounts for
around 10% of the market, but the majority of companies interviewed
considered themselves in need of financial support of some description.
The bank remains the main source of financing across Europe, although
there is a distinct north-south divide that clearly reflects the Impact of
cultural differences on attitudes towards finance. In the north, overdrafts
still prevail, while in the south, discounting is more popular.
This picture is reflected in the varying attitudes of businesses across
Europe to factoring. Interest in the services comes from a number of
different sources; for the growing majority, it is no longer seen simply as
an immediate cash injection and companies are demanding a wider
range of services from their factoring partners. Many see factoring as
providing a range of services and not just as a guarantee against the risk
of unpaid invoices and a debt recovery service, but also as a means of
compiling information on customer solvency and as a total customer
account management service.
These differing attitudes towards factoring, its uses and the availability of
suppliers, together with economic activity, drive the industry and account
for it's different stages of development. Great Britain accounts for one
30 Credit Control
Analysis
third of the European market. Its highly competitive nature attracts large
domestic and foreign banks, subsidiaries of industrial groups and
independent players. Over the past few years, the British market has
seen sharp growth and services are generally marketed through
intermediaries, unlike in Itaiy, where major companies - both public and
private - have set up their own companies for the financing of
receivabies, integrating the service into the contracts signed with
customers. Here, therefore, factoring is very widespread, dominated by
domestic operators and has a very iimited number of players - with the
top three holding a 50% market share. The Italian market is stiil growing
rapidly, mainly as a means of outsourcing receivables management and
debt recovery rather than as a source of finance.
Factoring in France operates within a highly regulated framework and
there are only 30 or so providers. The industry did grow sharpiy at the
end of the 199O's, particularly due to the transfer of risk from the banks
to the factoring houses, but this has now levelled out. Today, services
are mainly marketed through intermediaries, as in the UK.
Elsewhere, the provision of factoring facilities remains relatively
concentrated; it's traditionally less well understood and utilised in
Germany, although the market here has experienced a boom in growth
since 2000. In Spain, the market is dominated by the two big Spanish
banks, BBVA and SCH, and is similarly concentrated in Portugal.
Businesses across Europe appear to have a positive opinion toward
setting up standard trading practices within the Euro-zone, but in reality
this is still a good way off. Besides the differing stages of growth of the
industry, and the variety of views relating to the benefits it brings, which
in turn drive the kind of facilities available, there are the cultural
differences that colour attitudes towards settlement terms and the debt
recovery process to consider. Imposing a Europe-wide standard to
cover acceptable settlement terms will prove challenging when in the UK
and Germany it is considered acceptable to pay on average after 37
days, while in Spain, Italy and Portugal, you can wait anything up to 98
days before payment is considered urgent. Similarly, debt recovery
processes vary from country to country, so defining a single way forward
may be equally problematic.
Nevertheless, all the indications are that factoring will continue to
develop and be in demand across Europe, although in several countries
it has a way to go before it reaches the sophistication of the facilities
available in the UK. But with factoring providers delivering facilities to
customers wishing to operate on a cross-border basis, the innovative
and flexible approach of the UK market is sure to infiltrate less advanced
markets and over time the gap will surely close. Indeed, if the industry
can draw together the strengths of the individual countries - combining
the entrepreneurial flair of the UK with the reassuringly stringent
legislation of France protecting the client and the commitment to
factoring demonstrated by the nations of southern Europe, then it can
look forward to a robust and long future as a key provider of finance to
businesses of ail sizes and shapes across Europe.
Credit Control 31