According to our research, within the next two years some 86% of factoring companies will be offering the invoice discounting option. This complements available statistics on the very strong growth of invoice discounting in Northern Europe. For the remaining 14% who do not offer invoice discounting, there is also the emerging option of confidential factoring, where the factor still carries out collection, however under the client’s company name.
The main motivation behind companies demand for factoring also threw light on the trend towards invoice discounting. Only 18% of customers were thought to be principally interested in an outsourced collections service, whereas 71% were motivated primarily by access to non-bank cash flow finance (11% were interested in both to an equal extent.) So it would appear the collections element of full factoring is not the main driver of the adoption of this technique.When queried why invoice discounting is growing at a much greater than full factoring, respondents cited the lower cost of invoice discounting (43%), the saturated, fiercely competitive full factoring market (36%), and the increasing desire for companies to keep control over their sales ledgers (29%).
Whereas invoice discounting was historically a product that was only offered to firms with a turnover in excess of €2 million per annum, competitive pressures have now forced financiers to significantly lower this to a €750,000 turnover level. This subsequently requires more sophisticated technical and systems support in order to manage risk better when dealing with smaller, less established companies, as well as to mitigate fraud. At the other end of the spectrum, invoice discounting is also beginning to appeal to larger firms. In recent years, the average turnover of invoice discounting clients has risen considerably and is now between €8 million and €10 million. However, approximately 90 invoice discounting clients have annual turnovers in excess of €130m, according to FDA (Factors and Discounters Association) quarterly figures.
The confidentiality element of invoice discounting is often cited as another key advantage for the client, however is this really the case? The answer from our research is a resounding “Yes”. On a scale of 1 to 10, where 1 = not important at all and 10 = of vital importance, respondents gave the confidentiality element of invoice discounting an importance ranking of 7.5.
So what exactly were the obstacles that financiers saw to converting customers from factoring to invoice discounting? After registering the 22% who saw no obstacles at all to this customer conversion, the majority of respondent opinion focused on the view that there would remain a significant group of customers who were simply too risky (either in terms of credit status or collections processes) to be in receipt of an invoice discounting service. This obviously represents 39% of clients that would never be eligible for invoice discounting. Other obstacles cited were merely temporary ones: 22% held the view that more sophisticated technology and reporting improvements would be required before offering invoice discounting. A further 17% felt that a staff skills gap would also have to be addressed.