Factoring and invoice discounting companies in Northern Europe now turnover in the region of €312bn and the market continues to grow. Finance secured against invoice debt has become increasingly popular in a business community that has been subject to a tightening credit squeeze since the turn of the millennium. The availability of unsecured lines of credit, especially for firms with pressurised cash flow cycles and/or significant leverage, has simply dried up or become unaffordable. Availability of lower cost unsecured credit in the UK and France has tightened in the market over the last few years. Germany however has only recently become subject to sudden shut-down, as artificially inexpensive borrowing through the statesupported Landesbank system will no longer be available once the state guarantees are withdrawn in July 2005.
Across Northern Europe, with the exception of the UK, full factoring (where the lender also collects the invoice payments) has remained the core non-bank cash flow finance product available until recently. This is due to concerns about proving primary legal title to invoice debt in continental European civil code jurisdictions in the “arms-length” invoice discounting process. These legal problems have now been overcome, and both factoring and invoice discounting are now strong products throughout the region.
Whilst take-up of both of these secured financing products is growing, invoice discounting (where the borrower collects the invoice debt) is seeing the strongest growth levels. In the more mature UK market, full factoring makes up around 15%1 of the overall market. The balance between full factoring and invoice discounting is reversed in other Northern European countries. Growth in the total market varies between the major Northern European economies2. The UK is the largest marketplace (turnover in 2003 – €160.8bn) with a 3% growth rate. France starts from a lower base (turnover in 2003 – €73.2bn) but is growing at an annual rate of around 9%. Germany, where the market is yet young (turnover in 2003 – €35.1bn) is booming at some 16% per year.
In times of rapid market growth, players who can introduce business efficiencies or competitive advantages stand to attract the lion’s share of the emerging customer demand. In finance, this either means reducing cost of business (and being able to share part of those savings with customers), or understanding and managing risk better so that previously untenably risky companies may be financed, or at the very least compress the lending to collections cycle, to improve profitability.