Factoring: Concept, Evolution
Developments and Challenges
Peter Brinsley
Director, POINT FORWARD LTD
Evolution - Early History
• Origins in international trade. Factors acting as agents.
• “Modern” factoring started in the USA in the 20th Century. Mostly textile business.
• 1960’s – the concept was exported back to Europe by American factors
• 1963 : Foundation of International Factors Group
Recent History
– Significant growth in Europe – Start of invoice discounting
1980s
Recent History
– Significant growth in Europe – Start of invoice discounting
– Development in Asia, Central East Europe, Latin America – Asset Based Lending (ABL) in USA and later also UK – Less full service / more focus on receivables financing
alone : evolution towards “Commercial Finance”
1980s
1990s
Recent History
– Significant growth in Europe – Start of invoice discounting
– Development in Asia, Central East Europe, Latin America – Asset Based Lending (ABL) in USA and later also UK – Less full service / more focus on receivables financing
alone : evolution towards “Commercial Finance” – Further growth / more Bank-driven – Diversity of products : Factoring with recourse, non-
recourse, Invoice Discounting, Single invoice factoring, ABL, Trade Finance Products such as Reverse Factoring, Supply Chain Finance
1980s
1990s
2000s
Commercial Finance today
Invoice Finance Asset Based Lending Trade Finance products
Non-recourse Factoring Receivables and other Assets
Reverse Factoring
With Recourse Factoring Supply Chain Finance
Invoice Discounting SWIFT BPO (Bank Payment Obligation)
Portfolio & Transaction based
Portfolio based Transaction based
Common to all forms of Commercial Finance : It’s SECURED AND MONITORED FINANCING
Evolution of World Factoring Turnover
0
500
1000
1500
2000
2500
Billions USD1980
€50bn
1990 2000 2012
€200bn
€600bn
€2120bn
Africa & Middle East
32 (2%)
Asia 581 (28%)
South America 93 (4%)
North America 91 (4%)
Europe 1.257 (59%)
(1.173 EU)
Australia & NZ 64 (3%)
Total World: €2.119 billion (+8%) Source: IFG GIAR 2012
Factoring in Africa
0
5,000
10,000
15,000
20,000
25,000
0
500
1000
1500
2000
2500
3000
2007 2008 2009 2010 2011 2012 2013
Egypt Mauritius Morocco Tunisia South Africa
What do we mean by “factoring” ?
• A purchase of receivables by the financier – Factor takes ownership of the debt
• Target market is SMEs / mid-corporates • Suitable for B2B trade • Different from lending against receivable • Factoring allows you to finance more
because of risk mitigants – Greater understanding & close monitoring of the
receivable
What do we mean by “factoring” ?
• Factoring offers - Finance - Receivables administration - Collections - Protection against bad debts (= non recourse)
Developments
• Global shift to open account trade Global imports (Trn USD) 50
40
30
20
10
0 2011 2020
Open account Documentary trade
18%
82%
14
9%
91%
31 +8.7%
Revenue pools Bn USD
100
80
60
40
20
0 2011 2020
Open accounts Documentary trade Payments
10.5
22.9
5.2
31.2
25.0
13.5
38.7
+80%
69.6
Source: SWIFT, ICC, ITC, BCG
Developments
• Traditional trade instruments stagnating
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
in b
illio
n U
SD
LCs World Factoring Volume Open Account
14.000
2.730
1978 - 2012
Developments
• Factors expanding the product range and looking for new opportunities – ABL, SCF, Single invoice factoring – Interest in emerging and developing markets – Opportunities for significant growth and
revenues
• Initiatives with factoring legislation in Africa – IFG’s model law, OHADA
Challenges: for traders
Access to working capital – Banks not lending – Securities demanded by Banks not attractive – Loans, if available, do not reflect growth
Challenges; for Factors
Legal Environment 1. There is a need for clear
and non-disputable laws on assignment of present and future receivables
2. There is a need for priority rules in favour of the factor in case of bankruptcy of the client
Challenges: for Factors
Regulation – there’s good and there’s bad
X
Allows competition Applies minimum standards Helps position a credible and sustainable industry Excessive control Restricts competition Stifles innovation Cost and resource
Challenges: for Factors • Industry image • Marketing • Education
• of the market • your parent bank • your staff
• People • Skills • IT systems
Challenges: for Factors • Credit information • Credit insurance • Risk processes and procedures • Getting your money back
Thanks for your attention Merci pour votre attention
Questions ?