analysis of use of factoring

PROJECT TITLE:ANALYSIS OF USE OF FACTORING

DG ENTERPRISE – ACCESS TO FINANCE UNIT

ETD/00/503408

FINAL REPORT

GREATER LONDON ENTERPRISE LTD

CONTENTS PAGE NO.

1.Background to the Study 1

1.1 Introduction 1

1.2 Access to Finance by SMEs 1

1.3 The Role of Factoring 4

2.Executive Summary & Recommendations 7

3.Study Objectives and Methodology 11

3.1 Primary Study Objectives 11

3.2 Study Methodology and Approach 11

3.2.1 Desk Research 12

3.2.2 Supply Side Survey - European Factoring Industry 12

3.2.3 Demand Side Survey – European SME Associations 15

4.How Relevant is Factoring for SMEs? 17

4.1 What is Factoring? 17

4.2 Definition of Factoring Process and Products 18

4.2.1 Recourse and Non-Recourse Factoring 19

4.2.2 Invoice Discounting 20

4.2.3 Other Factoring Related Products 21

4.3 What is the Incidence of Factoring by SMEs? 22

5 HOW ACCESSIBLE IS FACTORING TO SMES? 295.1 How do Factors Assess Risk? 29

5.2 Security and Collateral 33

5.3 Legal Framework for Factoring 33

5.4 Factoring for all Business Sectors? 35

5.5 Factoring for all Types of Business? 40

5.5.1 Size of Business by Turnover 40

5.5.2 Legal Form of Business 41

5.5.3 Trading History 42

5.6 Costs of Factoring Finance 42

5.7 Cost of Factoring services 44

5.8 Image and Product Understanding 46

6.Structure of European Factoring Markets 49

6.1 Factoring Products and Relative Importance 49

6.2 Number of Factoring Companies 49

6.3 Market Concentration 50

6.4 Structure of Ownership of Factoring Companies 52

6.5 Government Influence on Factoring 54

7.Size of European Factoring Markets 55

7.1 Volume of Aggregated Factoring Turnover 55

7.2 Factoring Relative to GDP 56

7.3 Factoring Relative to Cashflow Financing 58

7.4 Volume of Factoring Turnover Disaggregated by Product 58

7.5 Volume of Factored Turnover – Domestic / International 59

7.6 Volume of Domestic Factoring by Product 63

7.7 Volume of International Factoring by Product 63

8.Summary Conclusions 67

Annex 1: Supply Survey Respondent Organisations’ Contacts

Annex 2: Supply Side Sample Survey Questionnaire

Annex 3: Demand Side Sample Survey Questionnaire

Annex 4: Demand Survey Respondent Organisations’ Contacts

Annex 5: Economic and Factoring Statistics

Analysis of Use of Factoring – ETD/00/503408 –Final Report (February 2003)

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1. BACKGROUND TO THE STUDY

1.1 INTRODUCTIONGreater London Enterprise (GLE) was commissioned in January 2002 by theEuropean Commission (EC) Directorate General for Enterprise (DGEnterprise) to conduct a detailed analysis of the use of factoring within andacross EU Member States.

The EC has a defined long term strategy addressing different aspects of theleading issues around access to finance by enterprises, with a special focusrelated to access to finance by SMEs.

This study, being undertaken on behalf of the Access to Finance Unit of DGEnterprise, forms an integral component of the EC’s strategy to identify andstimulate access to finance for all European SMEs – and more specifically, andpossibly most importantly, access to, ‘appropriate’, finance.

This study specifically investigates the incidence and appropriateness of the roleof factoring in meeting European enterprise finance needs.

1.2 ACCESS TO FINANCE BY SMEs

Whether due to supply or demand constraints, on average one in five SMEs inEurope considers access to finance as a barrier to growth. Clearly, stimulatinga competitive financing environment for all companies is a key element inpromoting an entrepreneurial economy and strengthening economic growth.

SMEs can finance their activities from internal or external sources. As shownin Table 1.1, there are considerable differences between Member States inrespect of the financial structure of SMEs between the share of own ‘internal’capital versus ‘external’ financing. In some Member States (for example, inGermany and Austria) small businesses rely much less on own capital and moreon readily available bank loans. In others (France, Belgium, Portugal) owncapital financing is more prevalent.

What is common though is that in most cases SMEs require external finance forbusiness expansion — be it loans, other types of debt, or equity.


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Table 1.1: Share of Own Capital in Total Balance Sheet by Enterprise Size

Size by turnover Austria Belgium France Germany Italy Portugal Spain

Less than € 7m 13 % 40 % 34 % 14 % 26 % 31 % 42 %

Between € 7m and €40m

27 % 38 % 35 % 22 % 25 % 40 % 43 %

€ 40m and more 31 % 39 % 35 % 31 % 28 % 51 % 37 %

All sizes 28 % 39 % 35 % 30 % 27 % 42 % 38 %

Source: The European Observatory for SMEs, Sixth Report

Figure 1.1 below, generated from the Exco Grant & Thornton survey ofEuropean SMEs 2001, depicts the relative use by SMEs of various forms ofexternal financing. It clearly shows the prevalence of overdrafts, bank loansand leasing as financing alternatives for SMEs.

Figure 1.1: Use of External Financing by SMEs

Source: Exco Grant & Thornton survey of SMEs 2001

60%50%

46%50%

39%40%

30%

20%11%

9% 9%10%

0%

External Investors Subventions Factoring Leasing Bank Loans Overdrafts


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As banks usually ask for collateral against their lending, (reflecting theirconservative approach to risk), the availability of collateral is an essential factorin SMEs securing access to bank financing (overdrafts and loans). Banks willgenerally require either real estate or other tangible assets as collateral, or aguarantee from a person or an institution. Typically, SMEs use what collateralthey have to secure start up business financing, and therefore may lackadditional assets to secure against raising additional debt finance for short termand long term expansion.

Overall, some 46 % of SMEs indicate that they use bank credit. Researchevidence1 exists showing that in countries where overdraft use is high, recourseto bank loans tends to be low (Italy, Greece, Denmark, United Kingdom).Further, a causal relationship is apparent in that, where access to bank credit ismore difficult, payment periods and payment delays tend to be the longest(Italy, Greece, Portugal, Spain).

Late payment of sales invoices is a key issue exacerbating the need for short-term finance by SMEs. The average payment period for sales invoices acrossMember States is shown in Table 1.2 below.

Table 1.2: Average Payment Period for Sales Invoices: Days (%)

Country Av. Days 7-14 15-29 30-44 45-59 60-74 75-89 >89Austria 31 20 30 27 8 3 4 2Belgium 52 2 16 22 21 24 7 5Denmark 30 11 41 37 4 1 1 1Finland 26 18 51 22 5 1 1 1France 58 7 8 17 13 26 14 10Germany 31 21 34 26 8 4 2 2Greece 83 4 4 11 6 9 16 46Ireland 56 4 7 23 23 21 9 10Italy 78 4 2 9 8 21 18 35Luxembourg 47 9 15 27 9 14 7 6Netherlands 43 6 22 29 18 16 3 3Portugal 70 2 3 20 14 21 14 26Spain 71 4 5 15 12 17 18 28Sweden 36 4 23 56 9 4 1 0UK 41 11 18 27 19 12 4 2EU Average 50 11 18 22 11 13 8 13Grant Thornton European Business Survey, 2002

1 See Commission Staff Working Paper, Enterprises’ Access to Finance, CEC 2001.


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As shown above, payment terms vary considerably in Europe, although overallthey have been reduced by 20% over the last decade to an average of 50 days.Variability is high, from 26 days in Finland and 31 days in Germany, up to 78days in Italy and 83 days in Greece.

Supplier credits are an important source of meeting the short term financingneeds for SMEs, and between 20% and 50% of outstanding ‘loan’ finance canconsist of supplier credits. The use of supplier credit depends on the length ofthe payment period, on the availability of ‘own’ funds, and on access to bankloans. For a considerable number of SMEs suppliers’ credits are moreimportant source of working capital than bank loans.

Supplier credit is generally conceived to be more expensive than bank loans andoverdrafts, as often clients receive a ‘discount’ in the case of immediatepayment. However, as is often the case, companies with liquidity constraintshave no choice except to opt for the more expensive solution, and absorb thenegative impact on the business that these high costs bring.

In this vein, the Exco Grant & Thornton European Business Survey 2002,noted that, on average across the EU, 15% of businesses reported lack ofworking capital as a constraint to short term expansion plans, and of financethat was available, 24% of businesses reported that the cost of this finance wasprohibitive to short term expansion.

1.3 THE ROLE OF FACTORINGFactoring companies often claim that they are an ideal financing option forsmall, young and fast-growing firms. As shown in the previous sub-section,many SMEs confront problems when attempting to gain access to externalfunding because of the difficulties faced by financial institutions in producingconsistently reliable risk-assessment processes. Particular problems for firmsmay be experienced in the management of working capital. In an attempt toalleviate such problems many firms (See Figure 1.1) have sought alternativeforms of finance by pledging an important element in their working capital, thatof accounts receivable, i.e. factoring.

A second dynamic often quoted by factoring companies in favour of theirparticular relevance to SMEs is that related to their ability to address skillsdeficiencies and/or high opportunity costs faced by SMEs in pursuing effectivecredit management functions.


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Despite impressive development in the factoring market, little academic workhas actually been undertaken to establish the role of the factoring industry insmall business development and the profile of businesses constituting its clientbase. This is as true for Europe, as it is for the USA and elsewhere. Similarly,national and international industry statistics and data for factoring are alsorelatively scarce, with only one reasonably comprehensive source, certainly forEuropean countries, being the World Factoring Yearbook. This study hascollaborated with the World Factoring Yearbook – who advised on the designof the study survey questionnaires to ensure that data collected under this studybuilt on, rather than replicated, the existing levels of knowledge and data on theEuropean factoring industry.

Whilst data might be relatively scarce, factoring is clearly an important, andgrowing, source of business finance. For example, factoring and invoicediscounting is estimated to contribute around 6% in additional finance to UKSMEs, compared with 6.5% provided through venture capital (British Chamberof Commerce, 1994; Cambridge Small Business Research Centre, 1995; Bankof England 1997, 1998, 1999). Furthermore, the UK Factors and DiscountersAssociation (FDA) indicated that currently factoring and invoice discountingnow accounts for more than 35% of the total cash flow financing requirementsof UK SMEs – the balance comprising bank loans, bank overdrafts, retainedprofits and internal financing sources, leasing, external investment – and thisfigure is expected to continue rising.

The importance, volume and structure of factoring differs markedly betweenEU Member States. Figure 1.2 below shows aggregate factoring volumes byselected Member States for 2001. Compare the UK and Italy, both with a longestablished history in factoring, demonstrating high volumes and many players,with, for example, Greece, where the first factoring company established onlyin 1995, whilst growing rapidly, is doing so from an obviously very small base.


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Figure 1.2 – Aggregate Volumes of Factoring by Member States (Million Euro)

Source: World Factoring Yearbook 2001, BCR Publishing

Additional to the variances in market structure and size, the specifics of thevarious factoring products also differ markedly across Member States. This isbecause the roots of factoring products are based on and around specific andunique national laws permitting the effective assignment of receivables.

Therefore, this study is intended to provide a strong baseline investigation inthe European factoring market. It builds on previous effort, presentingadditional comparative data on the relative size, structure, market development,volumes, and profile of factoring across Europe. Specifically, it considers thesupposition that factoring is highly ‘appropriate’ for SMEs.

Against all the above mentioned analysis we consider the possible role of policyinterventions to correct, address, and/or stimulate access to factoring for SMEsin Europe.

02 0 , 0 0 04 0 , 0 0 06 0 , 0 0 08 0 , 0 0 0

1 0 0 , 0 0 01 2 0 , 0 0 01 4 0 , 0 0 0

United

King

dom

Italy

France

German

ySpa

in

Sweden

Irelan

d

Denmark

Greece


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2. EXECUTIVE SUMMARY & RECOMMENDATIONS

1. The purpose of this paper is to investigate the incidence and role thatfactoring plays in the financing of SMEs across Europe.

2. Whilst marked differences occur between Member States, SMEs typicallyrely on external financing for more than 50% of their balance sheet value.Traditionally, this external finance has predominantly comprised bank loansand overdrafts. However, the incidence of asset based finance –including factoring – has been increasing rapidly over the past decade.

3. Factoring is not one homogenous product. Rather, it is a compositeproduct offering a mix of finance, credit insurance and financialmanagement services. The main three recognisable forms of factoring areclassified as Recourse, Non-Recourse and Invoice Discounting. All threeproducts are offered in each Member State, however, the volume of marketmix by these three products is not at all consistent across Member States.

4. Being a composite product, factoring is unique and does not have anyexact substitutes for the whole offering. Of course, it does havesubstitutes for its constituent components – bank loans and overdrafts forthe financial component – financial services companies or directemployment for the credit management component – and explicitcommercial credit insurance for the credit protection component.

5. Factoring charges separately for the financial and service components. Onaverage, financial charges, calculated on an interest basis, typicallyrange between 2-3% above bank base rates.

6. The service fee differs depending on the level and breadth of serviceoffered, but average fees range between 0.5-2%. The service functiontypically offsets two areas of business costs – employing a credit controlleron the one hand, and in many cases qualifying for a suppliers discount forprompt payment. Overall, factoring is seen as highly competitive.

7. Factoring is a business to business service. It is not suitable for allbusinesses as not all debts can be factored.


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8. With the exception of merger based contraction in three markets, thenumber of factoring companies across Europe has increased by 55%over the past 10 years. However, the level of market concentration istypically high with only 1 or 2 firms on average accounting for 50% ofmarket share by volume applying for each Member State.

9. Factoring companies typically fall within one of three categories – banks,large industrial companies, or independent. However, the majority offactoring companies in Europe are owned by banks – and in severalmarkets, more recently banks are buying deeper into the factoring sector.

10. The total volume of factoring across Europe has grown by a massive57% over 1998-2000 (albeit from a relatively low base), with increasesdemonstrated in each Member State. In 2000, the total aggregate factoringvolume for Member States stood at a not insignificant Euro 370,968million.

11. Whilst factoring is used for financing international trade sales, the vastmajority of business is concerned with domestic sales.

12. Factoring is specifically targeted and suitable for smaller businesses.On average, 50% of the total number of European factoring companyclients have turnovers of less than Euro 2mn, 81% of less than Euro 5mn,and 91% of less than Euro 15mn. This view is shared by European SMEAssociations where all of those who reported under this study indicatedwithout exception that factoring was a ‘useful and useable source offinance’.

13. Factoring affords businesses access to finance based on their growth insales, rather than bank loans and overdrafts which are normally availableagainst an accumulation of tangible assets. As a growing small business,investment in sales is often more a priority than investment in fixed assets.

14. Factoring appears to function in fairly competitive markets, with littlereported impact on growth being attributable to legal, fiscal or regulatoryissues.

15. Further, with banks taking factoring business more seriously, they areincreasingly ‘selling’ factoring products to their established clients inlieu of increasing overdraft limits. This can only increase the incidenceof factoring across Europe.

16. Whilst it is not within the scope of this study to analyse the impact of BaselII on factoring, it is arguable that the impact of reforms to bank


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legislation as proposed under Basle II may lead to a squeeze ontraditional bank lending to SMEs. With factoring companies measuringclient risk on a completely different basis to banks, any contraction in banklending to SMEs may well represent a realisable opportunity for factoringcompanies to take up this slack.

17. With no reported undue distortionary influences, continued growth in theEuropean factoring market will continue according to prevailingeconomic and market forces.

18. The impressive growth in factoring business over the past decade ischaracterised as ‘supply driven’ with more intensive market competition,leading to more informed and aggressive marketing to client SMEs.

19. However, on the demand side there appears several areas requiringfacilitated development if the market is to operate to its full potential.Specific demand side building measures would include:

q Raising Awareness of Professional SME Advisers

Engaging with respective government SME departments to agree initiativesfor raising professional awareness of factoring as a valid financing option bygovernment SME agencies, and professional business advisers engaged bythese agencies and other government service delivery organisations.

q Raising Awareness by SMEs

Engaging with banks, professional advisory organisations, and SMErepresentative organisations to agree a series of information and educationawareness raising initiatives targeting companies understanding of factoringas a financing option.

q Professional Engagement of Finance Providers

Engaging with banks to seek their views as to raising awareness of theirstaff, and seeking to develop more effective referral mechanisms tofactoring companies / subsidiaries. Whilst nothing was reported under thisstudy, it would still be useful to engage with banks and NBFI’s todetermine if public sector support is required to further develop the market– financial (guarantees) or non-financial.


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3. STUDY OBJECTIVES AND METHODOLOGY

3.1 PRIMARY STUDY OBJECTIVES

The stated objectives of this study are recalled as:

q an initial analysis of the use of factoring in all the countries of the EU (onlyshort term economic risk should be considered; neither long term norpolitical risk should be evaluated).

q Examine the conditions of access to the relevant instrument within the EUfor SMEs, identifying costs and obstacles to access.

q Establish a link between the conditions of access and the potential level ofuse for the development and export capacity of SMEs.

q Draft a final report with recommendations for possible policy actions to betaken in order to stimulate the use of factoring in the EU.

3.2 STUDY METHODOLOGY AND APPROACH

The primary methodology used for this study is confirmed as:

q Desk Research – confirmation, collection and review of headlinepublications documenting activities of the European factoring industry.

q Supply Side Survey of the European Factoring Industry – given thepaucity of published data on European factoring markets, this studydetermined to conduct a primary survey of European factoring markets.This survey is the primary source of market data presented in this study.

q Demand Side Survey of European SME Representative Associations –to balance the supply side survey and give insight into the level ofunderstanding of factoring, and how it applies to SMEs, a surveyquestionnaire was put to a large sample of European SME representativeorganisations.


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3.2.1 DESK RESEARCH

Desk research concentrated on effective liaison with the following keyorganisations:

q World Factoring Yearbook

q Factors Chain International

q Europafactor

q EURADA

Specifically, with each organisation the study team,

q Introduced the study objectives;

q Confirmed respective organisational support to the study;

q Confirmed and collected key documentation sources on factoring data andmarket information (which are extremely limited);

q Confirmed certain possible key contacts to serve as ‘national factoringassociations’ in several countries.

q Reviewed existing published factoring data and information.

It was clear that sources of data on European Factoring markets are extremelylimited. In fact, only the World Factoring Yearbook presents any commonanalysis and data. Therefore, the importance of this study’s primary surveyresearch was critical to generate added value information on market supply anddemand factors.

3.2.2 SUPPLY SIDE SURVEY - EUROPEAN FACTORINGINDUSTRY

Relating to the definition of a survey methodology, and implementation of thissurvey, the supply side survey aimed at primary data collection from ‘nationalfactoring associations’. Specifically the study,


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q Generated a sample frame of possible contacts prepared to serve as‘national factoring associations’ in each EU member state;

q Contacted, introduced the study, and confirmed support fromrepresentatives prepared to serve as ‘national factoring associations’ in eachEU member state;

q Based on information gaps, and requirements of the study, drafted outlinesurvey questionnaire targeting data collection from ‘national factoringassociations’;

q Discussion with leading factoring industry figures on the structure,wording, and depth of the survey questionnaire;

q Incorporation of comments received through above activity, and revision ofthe survey questionnaire – the questionnaires being tailored to be individualcountry specific.

Details of the lead factoring industry organisations in each Member State thatwere approached under the supply side survey are given in Annex 1. Anexample supply side survey questionnaire is presented in Annex 2.


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Compiling and confirming the sample frame was particularly fraught for anumber of reasons, as detailed below.

q Not all EU member states have formal national factoring associations, andfewer still have what might be termed ‘proactively meaningful’ associations;

q Of those member states boasting a defined national factoring association,few of these were staffed with full time secretariats;

q The majority of defined national factoring associations hold limitedpublished quantitative national factoring data, and rather engage in perhapswhat might be termed general advocacy, co-ordination and generalrepresentation functions.

In those countries where no formal association exists (such as the Netherlands,Ireland, Denmark and Greece) the approach was to make direct contact withsenior management of leading factoring companies in these countries,requesting their support in serving in the role as ‘pseudo’ national factoringassociation.

The supply side survey targeted all EU Member States, with the exception ofLuxembourg, where given its highly immature factoring industry it was agreedwith the EC that this Member State would not be a focus of the study and istherefore excluded from all subsequent analysis and commentary.

Survey responses were achieved for all other Member States, with thefollowing two exceptions:

q Netherlands – no formal association exists. A number of managementcontacts within commercial factoring companies were approached but nosupport was confirmed.

q Portugal – a formal association does exist, and repeated requests forassistance were made of its Principal. However, there appears a strongreluctance to support the study, and as of now no ‘new’ data for Portugalhas been compiled.


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3.2.3 DEMAND SIDE SURVEY – EUROPEAN SMEREPRESENTATIVE ASSOCIATIONS

As shown in the previous section, this study dedicated considerable resource toinvestigating and generating supply side statistics, analysis and views from theEuropean factoring industry. As valuable as this supply side view is to thestudy, a demand side view is also important to ensure a balanced picture ofmarket dynamics.

Therefore, this study determined to approach a wide range of European SMErepresentative associations and national chambers of commerce.

A short demand side survey questionnaire, reproduced in Annex 3, was drafted.Its aim was to confirm or otherwise some of the basic presumptions of thefactoring industry that factoring is appropriate for smaller businesses.

Details of those organisations that were approached under this survey are givenin Annex 4.

Demand side survey responses were achieved from eight organisations,indicating a reasonable 23% response rate; sufficient to present a demand sidebalance to the study analysis.

The data generated through the supply and demand side survey’s are theprimary source for analysis for this report as presented in subsequent sections.


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4. HOW RELEVANT IS FACTORING FOR SMES?

The following two questions are key to the focus of this study:

q How Relevant is Factoring to SMEs; and

q How Accessible is Factoring to SMEs

This chapter tackles issues related to the first question of relevance. Thequestion of accessibility is tackled in Chapter 5.

As shown in Chapter 1, to greater or lessor degrees, all European SMEs relyheavily on access to external finance to run, and particularly to expand, theirbusinesses. There are a range of external financing products available toSME’s including bank loans and overdrafts, leasing, and venture capital.

Factoring is an alternative route by which a business can increase its cashflowto fund expansions. However, factoring is the only method of externalfinancing that reacts instantaneously to both increasing and decreasing salesalike.

Further, factoring offers more than simply finance. Through matching financewith professional credit management services, and in some cases creditprotection, factoring stands out as unique from these other competing sourcesof external finance.

4.1 WHAT IS FACTORING?

Factoring is a financial facility offering improved cashflow for client businesses.However, factoring is not one homogenous product. It is wise, then, to definewhat we mean by factoring. Perhaps this can be best described by definingwhat is a factor?

“A factor is a ‘person’ that purchases a debt for a discount owed to another,in order to make a profit by collecting it.”

So, factoring is the sale and purchase of debts? This is true, however, it is therelationship between a factor and its client with specific regard to theembedded credit management services offered by the factor for collecting onthese debts that really defines factoring.


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So, all factoring companies pay their clients for their invoices as they areissued. However, factoring companies also offer a range of professionalservices that might typically include:

q Collecting payments from their customers

q Pursuing late payers

q Providing advice to clients on credit management

q Protecting the client against bad debts

This means that the benefits of factoring do not simply include an immediatecash payment. If the factor provides credit management services too, thenthere is also the prospect of an improvement in the speed at which debts arecollected, giving a further positive impact on cashflow, and reduced interestcharges. The headline costs and benefits of factoring are discussed in detail inChapter 5.

As shown below, the scope of these embedded credit management servicesdefine the various factoring products typically available in the marketplace.

4.2 DEFINITION OF FACTORING PROCESS AND PRODUCTS

In structuring this study it was necessary to distinguish between and to definethe various common types of factoring product. These are defined as:

q Recourse Factoring;

q Non-Recourse Factoring; and

q Invoice Discounting

The factoring process associated with of the above products is presenteddiagrammatically and explained below.


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4.2.1 RECOURSE AND NON-RECOURSE FACTORING

Recourse factoring involves a factor taking responsibility for their clients’ debtcollections but retains the right to seek full recourse from the client for any baddebts. The client may buy credit insurance separately but no cover is providedby the factor.

Non-recourse factoring offers the client full credit management service coveron approved debts against the eventuality of the factor being unable to securefull payment of factored invoices.

However, the process for recourse and non- recourse factoring is the same, ashighlighted in Figure 4.1.

Figure 4.1 Process of Recourse and Non-Recourse Factoring

To clarify the various steps in the process shown above:

Step 1The Client ships goods with original invoice to the Customer. This invoicewould normally instruct the Customer to pay the Factor (giving full paymentdetails). At the same time, the Client sends a copy of the original invoice to theFactor.

CUSTOMERCLIENT

FACTOR

Step 1

Goods + Invoice

Step 3Payment onDue Date

Step 3Collection Activity incl.statements, letters,telephone

Step 2Debt assigned inwith Factoring Agreement

Step 2Prepaymente.g.

Step 1Copy of Invoice Step 4

Balance onCollection/Maturity


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Step 2On receipt of the copy invoice by the Factor the associated debt is assigned tothe Factor in accordance with the Factoring Agreement. Simultaneously, theFactor makes available a credit line (normally of upto 80% of the invoice value)against which the Client can choose to immediately draw down a pre-payment(factors usually provide finance within one day of receiving the Client invoice).

Step 3The Customer pays the full invoice balance directly to the Factor on the duedate. In case of overdue payment against an ‘unchallenged’ invoice, the Factorinitiates the process of credit collection from the Customer (details of typicalservices provided, and costs, are presented in Chapter 5). In the case ofcontinued non-payment, it is normally the Factor who proceeds with legalaction and foreclosure against the Customer. In case of Recourse Factoring,the Factor has recourse to the Client for any outstanding uncollected debt.Conversely, under non-recourse factoring the Factor assumes any loss (in somecases such loss may be protected through credit insurance held by the factor).

Step 4On payment by the Customer (or in case of late payment on an agreed date) ofthe full invoice amount, the Factor credits the balance (less the prepayment andfees) to the Client account.

The Factoring Agreement with the Client is, in almost all cases, on a WholeTurnover Basis (rather than individual invoices), and as such, the factoringprocess is perpetual. This is an important point and means that factoringinvolves the Client selling its entire ‘sales ledger’ to the Factor.

4.2.2 INVOICE DISCOUNTING

In the case of recourse and non-recourse factoring, the involvement of theFactor is normally ‘disclosed’ to the Customer. However, most invoicediscounting agreements are managed on a ‘confidential’ basis, where theCustomer is unaware of the involvement of the Factor. The invoicediscounting process is shown in Figure 4.2 below.


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Figure 4.2 Process of Invoice Discounting

The process of invoice discounting follows almost exactly that of factoring asreferred to in the previous section. However, as a ‘confidential’ service, underinvoice discounting the Client chases payment from the Customer directlywhere this payment is made to a nominated Trust Account held under controlby the Factor.

As demonstrated, invoice discounting is much more about access to finance,rather than factoring which is more about access to finance with professionalservices. This is reflected in the typical size of clients that are suitable for eachservice – with invoice discounting more appropriate to medium and largerclients with resources enough to run a professional credit managementfunction, and factoring, conversely, more appropriate to smaller firms.

4.2.3 OTHER FACTORING RELATED PRODUCTS

The definitions given in 4.2.1 and 4.2.2 were used as base definitions incarrying out this study research thus ensuring a common understanding bystudy survey recipients across the EU. On the whole they were understoodwithout question. However, two alternative, but related and similar productswere also mentioned as being used some Member States:

THEFACTOR

TRUSTACCOUNT

THECLIENT

THE CUSTOMER

1. The client sends their invoice to the customer4. The client chases the customer directly

5. The client receives payment directly from the customer

2. Th

e clie

nt se

nds c

opy i

nvoic

es

(or

sales

ledg

er de

tails)

to th

e fac

tor

3. The factor releases up to 80% of the invoice value

7. The factor releases the remaining 20% to the client

6. The client pays the proceeds from the

customer into a nominated trust account

held to the discounter’s order


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q Discounted Bills of Exchange – A bill of exchange is an unconditionalorder in writing addressed by one person (the supplier) to another (thebuyer). It is signed by the person giving it (the supplier) requiring theperson to whom it is addressed (the buyer) to pay on demand (or perhaps ata fixed or determinable future time) a sum of money to a specified person.Once signed by both parties the bill is classified as having been ‘accepted’.Accepted bills may then be sold to another party for a discount so that theycan collect it for a profit. This is exactly the same process as factoring,except that bills of exchange are used as the ‘legal asset’ rather than themore common use of an ‘invoice’. Bill discounting is the common form offactoring in France where it estimated the some 80% of all trade is on billsof exchange (traites). In France the factoring industry offer a serviceincluding raising the bills and subsequently discounting the ‘accepted’ bill.

q Confirming - This is a type of finance where a financial body confirmorders placed by buyer to the seller – i.e. funding the purchase ledger ratherthan the sales ledger. The financial body guarantees payment to the sellerwhilst offering credit to the buyer. The system was originally used toprovide comfort to exporters. It was further developed in the UnitedKingdom in the 1960’s by factoring companies to provide another serviceto their clients to enable them to expand. It was usually provided on theoccasion when a factoring client received a large order it could not fund thefactor provided funding and recovers it funds from the resultant factoreddebt. This system of helping clients was reduced when banks bought intofactoring companies but it is still operated by some of the smallerindependent factors in the UK and is offered as a service in Spain.

Neither Bills of Exchange nor Confirming are substitutes for factoring. In thecase of the former, it is simply factoring using ‘bills’ rather than ‘invoices’ as‘assets’. In the case of the latter, Confirming is used for the financingpurchases, rather than sales.

4.3 WHAT IS THE INCIDENCE OF FACTORING BY SMES?

It is argued that factoring is a highly appropriate source of working capitalfinance for smaller businesses. The following rationale in support of thissupposition is generally quoted:

q The cost of funds are competitive against alternative, typically bankoverdraft, product charges;


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q The availability of funds through factors is higher to smaller ‘growing’businesses than traditional sources (i.e. bank overdrafts) because factorsconsider the sales invoice as a secure asset, whereas banks typically lookfor fixed assets as security;

q Clients know and can plan for the actual value of charges made by factors,whereas, bank overdraft charges can be variable;

q Factors are able to process and pay against invoices considerably morequickly than the time taken to renegotiate any overdraft extension; and

q The credit management services offered by factors often provide aneconomic solution to smaller businesses who either do not have the relevantskills internally, or the opportunity cost of undertaking these functions areprohibitive.

Conversely to some of the above rationale, factoring is generally not perceivedto be of value to larger businesses for the following reasons:

q Above a certain size, businesses may be motivated and able to pay for therequisite credit management skills; and

q Above a certain size, businesses may well be able to source comparativelycheaper sources of finance, through perhaps a stronger negotiation positionwith their bankers, or having more control of managing trade credits, orperhaps their increased ability to raise capital through external sources(including increasingly the use of corporate derivatives).

In the supply side survey we asked factoring industry respondents to providedetails of their client profile, through banding their clients by turnover. Theresults achieved are shown over:


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Table 4.1: Factoring Clients by Size of Client Turnover (Euro)

Annual Client Turnover (Euro)

0 - 500,000 500,001 - 2,000,000 2,000,001 -5,000,000

5,000,001 -15,000,000

>15,000,000 Total

Clients % TotalClients






Austria 100 20% 200 40% 150 30% 50 10% - 0% 500 100%Belgium - 85% - 10% - 3% - 1% - 1% - 100%Denmark 200 10% 400 20% 600 30% 600 30% 200 10% 2000 100%Finland - 5% - 15% - 22% - 23% - 35% - 100%France 50-75% 22-45% 3-5% 21,600 100%Ireland 20% 70% 10% 100%UK 11,600 40% 6,380 22% 7,830 27% 2,030 7% 1,160 4% 29,000 100%

Source: GLE Study Survey Questionnaire 2002


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A headline summary of Table 4.1 is shown in Table 4.1a.

Table 4.1a Summary of Factoring Clients by Size of Client Turnover

Client Turnover Less than 15mn Euro Client Turnover More than15mn Euro

Client with turnover to 2mn Client with turnover to 5mn Client with turnover to 15mn Clients with turnover >15mnAustria 60% 90% 100% 0%Belgium 95% 98% 99% 1%Denmark 30% 60% 90% 10%Finland 20% 42% 65% 35%France 63% 95% 95% 5%Ireland 20% 90% 90% 10%UK 62% 89% 96% 4%Average 50% 81% 91% 9%

GLE Study Survey Questionnaire 2002


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There are a number of observations to make from Tables 4.1 and 4.1a.Perhaps the most important is that, reasons aside, an average of 50% of factorclients have annual turnovers of less than Euro 2mn. This increases to 81% offactor clients with annual turnovers of less than Euro 5mn, and 91% of factorclients with annual turnovers of less than Euro 15mn. On average, only 9% offactor clients have turnovers greater than Euro 15mn – reduced to only 4% ifFinland, showing a disproportionately high number of clients, was removed.

So, certainly in terms of performance, factoring is certainly catering for smallerbusinesses typically with annual turnovers of less than Euro 5mn.

Four survey respondents indicated total numbers of actual factor clients byturnover bandwidths. This makes particularly interesting reading, and offerssome rudimentary insight into the future potential for expansion of factoringservices. We take the UK as an example:

q There are a reported 29,000 business clients using factoring services;

q The UK statistical service reports a total business stock of 1.664mnregistered businesses in 2001, of which it is reasonable to estimate 90% ofthese are SMEs, which extrapolates as around 1.5mn;

q Extrapolating further from this, only 2% of UK registered SMEs currentlyuse factoring services;

q The EU Access to Finance 2001 report predicts that 50% of UK SMEs useoverdrafts, which translates as 750,000 businesses;

q Therefore, if factoring is seen as an alternative to overdrafts, and whilst notall firms will use, or be appropriate to using factoring services, there wouldseem a large potential gap to fill between the current 29,000 factoringclients, and the estimated 750,000 SMEs using overdraft facilities.

When also considering that Austria only boasts a total of 500 factoring clients,and Denmark 2000 clients, it would seem reasonable to assume that thereexists a large potential for growth in factoring business across the EU.

The above reflections are based on a supply side industry view. What aboutthe demand side – small businesses themselves? In our demand side survey ofEuropean SME Representative Associations the overwhelming opinion wasthat factoring is a useful and useable source of finance for all SMEs.


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A total of 62.5% of demand side survey respondents believe that factoringrepresents a cheaper and/or at least similar cost option than alternative sourcesof finance (indicated as bank loans and overdrafts).


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However, the same respondents confirmed that in most instances whilst SMEsmay be aware of factoring, it is hardly ever used. This raises the interestingquestion that – if both the supply and demand side forces both recognise thatfactoring is relevant to SMEs, and that the costs of factoring are comparativeto alternative sources of finance, why then is there a relatively low take up offactoring by SMEs? This question is explored below where the issues of accessto factoring are considered.


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5 HOW ACCESSIBLE IS FACTORING TO SMES?

In Chapter 4 issues related the relevance and incidence of factoring to SMEswere discussed. In this Chapter the focus is on issues related to the‘accessibility’ of factoring by SMEs.

5.1 HOW DO FACTORS ASSESS RISK?

ICT innovations enabled banks to improve and change their risk assessmentprocedures dramatically. The development of a so-called ‘rating culture’ willlead to more risk-sensitive pricing, focusing on enterprises’ individual risk. Theprocess of introducing the regulatory banking framework, the so-called Basel IIprocess, put the spotlight on these changes and accelerated the transition.

A factor approach to client risk assessment is markedly different to that of banklending. Banks ‘lend’ money to clients, and whilst they may well take adebenture over the company with respect to their loan, they do not ‘own’ thedebt in the sense of being able to ‘control’ the debt. Therefore, banks areprimarily concerned about the ability of the client to make productive use of thedebt to ensure a sufficient enough return to service the debt. In mitigation ofrepayment default by the client, banks usually seek to take collateral.

Factors on the other hand do not ‘lend’ money to clients. Factors takeassignment over a client invoices – or in effect ‘purchase a clients debts for adiscount’. As explained in the previous chapter, under this arrangement,factors make a pre-payment to the client of an agreed percentage of the valueof the assigned invoice. The remaining balance (less the pre-payment and fees)of the assigned invoice is paid to the client when the invoice is paid to thefactor by the customer (or at an agreed specified future date). Unlike banks,under this arrangement, the factor effectively ‘owns’ the invoiced debt and hasfull legal recourse to pursue this invoiced debt in the case of non-payment bythe customer.

Therefore, as a first point, factors typically have no need to, so do not, seekcollateral, additional to the assignment of the invoice, as security from theirclients. As an exception, some factors do seek security against fraudulentpractice by the client. This issue of security and collateral is discussed inSection 5.2 below.


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So, what are factors interested in ensuring when assessing client risk?Primarily, factors assess prospective clients with respect to:

q The ‘factorability’ of the clients product / business;

q The quality, strength and performance of the sales ledger;

q The profile and credit worthiness of the clients main debtors;

q The quality and integrity of sales invoices; and

q The quality, clarity and consistency of client administration anddocumentation.

In making judgements on the above considerations, it is normal for a factor,giving consideration of a facility to a prospective client, to carry out a survey ofthe business. Sometimes this survey is known as an initial audit, or an initialinvestigation, or perhaps due diligence.

All survey reports would involve a visit to the clients’ premises, normally forup to one day and survey reports normally are completed within two workingdays for presentation to senior management of the factor. The seniormanagement team then makes a qualitative judgement on whether or not totake on the prospect as a client.

Whilst every factor will have their own internal survey report format andconsiderations, a typical survey audit would address issues as outlined in Table5.1.

Should a factor choose to offer a facility to a prospective client, as mentionedabove, it is not usual for the factor to seek security, additional to the factoringagreement, from the client with regard to protecting the factor against businessfailure. However, it is more common for the factor to seek personal guaranteesfrom the directors of the client business to protect the factor against anyfraudulent practice on the part of the client.


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Table 5.1: Checklist of Factor Risk Assessment Procedures

AREA OF INVESTIGATION KEY INDICATORS (INCLUSIVE)The Constitutional Set Up of the Client – presentation of the‘headline’ information on incorporation of the client

q Business Details (name, address, trading style etc)q List of Directors and shareholdersq Details of Auditors, Bankers and Charge Holders

Sales Ledger Analysis – building a picture of the size andquality of the sales ledger, including the quality of associateddocumentation.

q Check on Debtor Statements (are they reconciled; agree with ageing)q Profile of debtor businessq Analysis of debtor profile (normally for top 10-20 debtors)q Quality of sales ledger documentationq Ledger analysis – relative size of debtors, payment terms, bad debtsq Average invoice valueq Average credit note valueq Credit notes as percentage of turnoverq Average remittance advice valueq Average debtor balanceq Average debt turn

Product Analysis – confirming the extent to which the productis ‘sell and forget’ confirming the factors ability to legallyenforce the assigned debt.

q Nature of the business;q Assessment of warranties, guarantees, returnable containers, schedule delivery, long term

contracts, retrospective discounts, constructive delivery, product insurance, free issue material


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Invoicing and Sales Order Process – confirming the trail ofdocumentation is appropriate and clear from enquiry-order-invoice. Also, investigating the reasons behind disputedinvoices.

q Invoicing process and documentation quality - orders in writing, proof of delivery,acknowledgements, self billing, payment terms, layout clarity of invoice information

q Sales order process and documentation quality –system of handling sales enquiries through toinvoicing

q Analysis of disputed invoicesq Analysis of remittance advice’s

Financial Analysis and Statements– a general picture of thefinancial structure of the client business and confirmation ofsolvency.

q Analysis of turnoverq Analysis of financial facilities and conditions thereofq Current balanceq Cash book balanceq Value of unprocessed cheques

Suppliers and Creditors – confirmation of payment terms andperformance of the client with its creditors.

q Analysis of contracts with major suppliers and supplier paymentsq Confirmation of any legal proceedings taken or threatenedq Confirmation of any judgement debtsq Payment terms


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5.2 SECURITY AND COLLATERAL

Building from the previous section is the question of the impact of the factorapproach to security and collateral on accessibility of factoring by SMEs.

Banks usually ask for collateral security for their lending, which reflects theirconservative approach to risk. The availability of collateral is an essentialcondition in securing access to loans for healthy businesses. Banks willgenerally require either real estate or other tangible assets as collateral or aguarantee from a person or an institution.

Innovation in overcoming this conservative approach has seen impressivegrowth of leasing services and general asset based financing whereby the bankcan more effectively service the SME through financing other than traditionalloans or overdraft facilities.

Similarly for factoring, which is a form of asset based financing, here the factor‘owns’ the debt legally, rather than takes a charge on the debt to be redeemedonly in a receivership situation – i.e. each invoice should be a legallyenforceable debt in its own right. This issue is important with respect to theissue of fixed verses floating charges. Specifically, the difference between banklending and factoring – where in the latter case, instead of the companyproviding security in the form of a charge over book debts, it ‘assigns’ thosedebts to the factor.

Thus banks may prefer to offer working capital through factoring, rather thanthrough traditional overdrafts secured by a fixed or floating charge on the bookdebts. This realisation is possibly reflected in the observations made later inthis report, noting that banks are increasingly entering the factoring market.

So, unlike banks, factors are not concerned with taking security additional tothe book debts.

5.3 LEGAL FRAMEWORK FOR FACTORING

The availability of factoring, and its cost, are directly related to the risk thefactor bears. Accordingly the legal framework with regard to the transfer ofownership of a debt and the rights of a creditor in cases of default are mostimportant considerations.


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It is beyond the scope of this study to undertake a full cost-benefit analysis ofthe legal framework for each Member State. However, there are certain issuesrelated to the prevailing legal framework governing the assignation ofreceivables and enforcement of collection thereof, which could affect theaccessibility of SMEs in certain countries to factoring services.

Firstly, there is the issue of the mechanics of legally transferring the ownershipof a debt - how long does it take, what is involved, and what does it cost?. Thelaws under which ownership of debt can be transferred are specific to eachindividual country circumstance and no common theme across countries isidentifiable.

However, the physical process for assigning debts differs in each country. Forexample, in most countries, the equitable assignment of debts is automaticallycovered in the factoring agreement between the factor and the client. Whereas,in the Netherlands, the factor must take a documented list of all invoices to befactored that day to a court of law to be stamped by an officer of the court.This clearly has a differential impact on relative efficiency of the process.

Further there is a question concerning the strength of the factor’s legal positionin cases of default? Again, with laws and processes specific to each MemberState it is not possible to define a common theme across all countries.

However, we can make an observation with regard to the relative penalties fordebt defaulters across Europe. For example, in the UK it is not uncommon forcheques to be returned unpaid with little or no impact on the credit rating forthe offending party. Whereas in France, if a debtor negates on payment of aBill it is reported to the Bank of France who act also as a credit rating body.Therefore the act of a single default in France could well affect, as a matter ofcourse, the future credit rating of the debtor.

Whilst the legal process is different in each Member State – and there willtherefore be cost and risk differentials between Member States – on balance, itis not thought that the impact of this will significantly affect access to factoringby SMEs in one Member State over another.


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5.4 FACTORING FOR ALL BUSINESS SECTORS?

Factoring is a business-to-business service. In no EU country is factoringavailable for consumer debts i.e. the explicit debt transaction between aconsumer and a retailer. However, some new product innovations areaddressing this potential market, particularly in the case of large retailers takingconsiderable credit card purchases, and perhaps medical insurance. However,whilst these innovations may service at the consumer retail level, they remainbusiness to business, and not business to consumer transactions i.e. the debtbeing factored is the debt owed by the credit card / insurance company (thedebtor) to the ‘retailer’.

Not all debts can be factored. The first question any factor will consider beforeagreeing to take on an item on a company’s sales ledger is: “is there a debt?”Or, rather, “is there a legally enforceable debt?” As such, factors preferbusinesses that provide goods or services with no extended tie in to anythingelse such as maintenance contracts, extended warranties or retentions.

Similarly factors are not looking for businesses whose activities are likely toinvolve the possibility of ‘lumpy’ or ‘stage’ payments.

The types of industries that tend not to be suitable for factoring would includeconstruction related businesses, telecommunications, computer services orsimilar. This is as much a legal issue as it is a general problem relating to theseindustries. Typically, invoices issued are often related to stage payments. Assuch, these invoices may not be fully enforceable until the whole contract issatisfactorily completed. The debts may be paid but may also be subject torecourse if at a later date the contractor defaults. This relates to the questionstated above, “is there a legally enforceable debt?”

Businesses with simple ‘sell and forget products’ suit factors best.

Good examples of industries that tend to be suitable for factoring wouldinclude temporary recruitment, logistics /transport/ courier services,manufacturing, engineering, printing and design, advertising or similar. Inmany of these industries, businesses like temporary staff agencies and officecleaners often do not have or need substantial assets. This can often meanbank facilities are not available. Whereas factors will purchase the agency’sinvoices because these are substantiated by time sheets or satisfaction notessigned by the customer. These types of companies consider factoring as highlyappropriate as the factors provide funds that allow them to expand relativelyunfettered.


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The supply side survey of the European factoring industry confirmed the typicalsectors where factoring businesses is executed, and those sectors that weretypically excluded.

Unsurprisingly, respondents explicitly mentioned Construction and Software astypical sectors excluded from factoring. However, it is noted that elementswithin these sectors may well be suitable for factoring. For example, the supplyof raw materials (say, concrete and bricks) to a construction project wouldprobably be factorable, whereas those activities related to the actualconstruction itself would probably not be factorable. Similarly, within thesoftware sector, the supply of off-the shelf equipment (say, Windows software)would probably be factorable, but those activities related to the development ofbespoke software solutions probably would not.

Again, the general rule relates to ‘factorability’ and as such no whole ‘sector’ isfundamentally excluded from access to factoring.

In the same survey, we asked respondents to give indications of breakdowndistributions of use of factoring services by business sector. Each countryclassifies ‘sectors’ using varying terminology, rather than standard SIC typeclassifications, but nonetheless, the results are useful, and are thereforepresented in Table 5.2 below. In Table 5.2 we have aggregated results to beexplicit about the ‘top’ four sectors in each country, classifying the remainderas ‘others’.

The results show a heavy bias in most countries to the following sectors:

q Manufacturing – possibly the most important;

q Transport and Distribution (including Trade) – next most important; and

q Services the next most important still (but in line with structural economicshifts in many EU member states away from ‘primary’ and ‘secondary’sectors towards the ‘tertiary’ sector, the latter services sector is rapidlygrowing in importance to factors).

Other key sectors reported include Electrical / Electronics, Chemicals, Foodand Textiles. Of course, sectors supported will typically follow patternsaccording to possibly:

q The sectoral composition of any individual economy; and


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q The sectoral focus of growth of ‘industrial’ owned factors servicing withintheir respective supply chains.

Of course, as factoring competition grows in each country, one would expectthe sectoral distribution of factoring services across countries to more reflectrespective economic activity bias.


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Table 5.2 Distribution of Factoring Services by Business Sector

Country Sector 1 Sector 2 Sector 3 Sector 4 OthersAustria Electrical 35% Wood, Glass &

Chemicals16% Rendering Services 13% Textiles 9% 27%

Belgium Electronics 14% Textiles 13% Building Materials 13% B2B Services 13% 47%Denmark Textiles 15% ICT 15% Electronics 10% Furniture 10% 50%Finland Manufacturing 46% Trade 28% Building 23% Transport 1% 2%France n/a n/a n/a n/a n/a n/a n/a n/a n/aGermany Manufacturing 47% Trade 40% Services 13% - - 0%Greece Food 20% Electrical 10% Chemicals 7% Paper 7% 56%Ireland Distribution 40% Manufacturing 30% Services 30% - - 0%Italy Transport 19% Trade 19% Telecom Services 6% Electrical 4% 52%Netherlands n/a n/a n/a n/a n/a n/a n/a n/a n/aPortugal n/a n/a n/a n/a n/a n/a n/a n/a n/aSpain Manufacturing 34% Construction 19% Transport 13% Trade 11% 23%Sweden Manufacturing 50% Transport 30% Services 20% - - 0%UK Manufacturing 40% Services 35% Distribution 25% - - 0%



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5.5 FACTORING FOR ALL TYPES OF BUSINESS?

In discussing issues of access to factoring by SMEs, the supply side surveyinvestigated the impact of the following variables related to the ‘type ofbusiness’:

q Size of Business by Employees

q Size of Business by Turnover

q Legal Form of Business

q Trading History

Each of the above variables is discussed below.

5.5.1 SIZE OF BUSINESS BY TURNOVER

The survey did not approach the issue of whether the number of employees inany business affects the decision of a factor to take on that business as a client.However, reference is made to preliminary conclusions reached by KhaledSoufani, in his report entitled ‘The Role of Factoring in Financing UK SMEs: asupply side analysis’ – published in Journal of Small Business and EnterpriseDevelopment, Volume 8, Number 1, 2001.

Soufani reports that 78% of factors interviewed considered size of business byemployment to be irrelevant to their decision making process. However, theydid indicate that about 70% of their client businesses employed less than 15people. This observation is consistent with the results on Incidence ofFactoring by SMEs, presented in the Chapter 4 of this report.

The size of a company’s sales ledger was considered a possible issue affectingaccess to factoring by SMEs – specifically, how far down does factoring reallyreach?

This issue was considered from two perspectives:

q Any minimum turnover below which factors will not engage; and

q A typical factor client profile differentiated by size of turnover.


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The supply side survey attempted to identify exclusions that are commonlyapplied in each EU country with regard to company size, sales ledger turnover,customer-base and business sector.

Survey figures reported differ markedly by respondent country makinggeneralisations for the European factoring industry impossible. Generally,turnovers greater than Euro 0.5 million seems to be looked for – but notnecessarily so. Certainly, as competition increases, one would expect factoringto reach down to businesses with levels requested in the UK – as low as Euro100,000. The results received are shown in Table 5.3:

Table 5.3 Typical Exclusions by Size of Turnover

Austria Not less than Euro 500,000Belgium Not less than Euro 25,000Finland Not less than Euro 500,000Germany Preferably more than Euro 2.5 millionGreece Not less than Euro 300,000Ireland Not less than Euro 500,000Italy No ‘typical’ exclusionsUK Not less than Euro 100,000


It is noted though that there will always, generally, be someone willing to takeon the debts of a company, whatever their turnover. However, it isacknowledged that the costs charged for small sales ledgers may well beprohibitively high for very small businesses.

It is also common practice for factors to shy away from businesses with toohigh a proportion of their debts with a single company. The risk exposure isoften considered too great.

5.5.2 LEGAL FORM OF BUSINESS

The supply side survey requested respondents to comment on general rulesapplied that might result in the exclusion of certain categories of client.

With regard to the legal form of business, typically, factors reported that theywould prefer clients who were registered as limited liability companies.However, Sole Traders and Partnerships were reported as acceptable forms ofbusiness for clients. The only exception reported was for ‘private persons’which of course reinforces that factoring is a business-to-business service.


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5.5.3 TRADING HISTORY

No typical exclusions were noted with respect to trading history. However,factors would ideally be looking for clients with an established trading history,typically more than 3 years. However, in line with earlier report comments,clients in the services sector particularly are becoming increasingly moreimportant to factors, and many of these businesses are ‘young’ but with strongcustomer bases, demonstrating good growth potential and therefore worthy ofconsideration by factors.

5.6 COSTS OF FACTORING FINANCE

The calculation of the costs of factoring is dependent on the followingconsiderations:

q The factoring product;

q The costs of credit; and

q The costs of associated credit management services.

We concentrate in this section of the first two considerations shown above.The costs of services are considered in the following section.

Table 5.4 shows the costs of capital reported by the factoring industry for eachcountry, differentiated by product type. We do not have typical charges foralternative (overdraft) products, but did ask each respondent to confirm therelative competitiveness of credit advanced through factoring to alternativeproducts – the options given were:

q Very Competitive - (factoring is cheaper than alternative)

q Competitive – (factoring is about the same as alternative)

q Not Competitive (factoring is more expensive than alternative)

In all cases factoring was reported as being Competitive. The exception wasthe UK which reported that factoring was Very Competitive.


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The question of price competitiveness of factoring finance was raised in ourdemand side survey of SME Representative Associations. From this survey,62.5% of respondents felt that, in their opinion, the costs of factoring werecomparable, and/or cheaper, than alternative sources of finance (being quotedas bank loans and bank overdrafts). 25% of respondents reported that, in theiropinion, factoring is too expensive for SMEs (although respondents clarifiedthese responses as being more targeted at very small businesses).

There was little reported difference between the interest charges for moneyadvanced through either recourse or non-recourse factoring products, withtypical quoted mid-range values being 2-3% above bank base rates.

However, it is noted that credit charges for invoice discounting are lower thanfor recourse and non-recourse, with typical mid-range values reported as 0.5-1.5%. It is reasonable to suggest that this is so because, typically, clients usinginvoice discounting services tend to be relatively larger businesses, turning overlarger volumes and therefore attract a slightly lower fee, and are in a betterposition to negotiate.

Naturally there is an issue here over the competitiveness of bank-owned factorsversus independent / private factors. Clearly, bank-owned factors should beable to ‘borrow’ money ‘internally’ at base, whereas independent / privatefactors may well be relying on bank credit lines attracting their own base rateplus interest charges – thereby there is a case for suggesting that the costs ofborrowing differ between bank owned and non-bank owned factors, thereby, inprinciple, affecting their relative competitiveness.

Conversely, whilst the above may well be true, as mentioned earlier in thisreport, bank-owned factors typically adopt a more standardised and risk-averseapproach than do independent / private factors, who whilst they may be slightlymore expensive, would still have a market at the fringes.


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Table 5.4 Costs of Factoring Credit Advances

Recourse Non-recourse Invoice discountingCountryAustria Eb 1.0% - 3.5% Eb 1.0% -3.5% Eb 1.0% - 3.5%Belgium Eb 1.0% - 5.0% Eb 1.0% - 5.0% Eb 0.85% - 2.5%Denmark Eb 2.0% - 5.0% Eb 3.0% - 6.0% Eb 2.0% - 5.0%Finland Eb 0.5% - 3.0% Eb 0.5% - 3.0% Eb 0.5% - 2.5%France Eb 2.0% - 3.0% Eb 2.0% - 3.0% Eb 0.5% - 1.5%Germany Deal Basis Deal Basis n/aGreece Eb 1.5% - 2.5% Eb 1.5% - 2.5% Eb 1.5% - 2.5%Ireland Bb 2.0% - 4.0% n/a n/aItaly n/a n/a n/aNetherlands n/a n/a n/aPortugal n/a n/a n/aSpain Eb 1.0% - 3.0% EB 1.0% - 3.0% n/aSweden Bb 1.0% - 3.0% n/a n/aUK Bb 2.0% - 4.0% Bb 2.0% - 3.0% Bb 0.5% - 2.0%Source: GLE Study Survey Questionnaire 2002Key - Eb = EuroLibor; Bb –National Bank Base Rate

5.7 COST OF FACTORING SERVICES

All factoring companies pay their client businesses for their invoices as theyare received. As mentioned previously, they may also offer one or acombination of credit management services, comprising such as:

q Collect payments from their customers

q Pursue late payers

q Provide advice to clients on credit management

q Protect the client against bad debts

The way factors charge for services differs by company – some charge on a‘menu’ basis providing individually priced service options from which the clientcan pick and choose – however, it is more common for factors to providecommon defined basic services and quote one encompassing standard fee.


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Table 5.5 shows typical service fee costs as percentages of factored invoicevalue. Non-recourse fees tend to be the highest with typical mid-range chargesof 1-2%; recourse factoring the next costly with typical mid-range charges of0.5-1%. Invoice discounting is the cheapest at 0.25-0.5% of invoice valuereflecting the relatively few services typically provided with this product.

In terms of qualifying these charges through a rudimentary commercial cost-benefit consideration, we can consider three ‘benefit’ elements:

1. The cost of hiring a qualified credit controller is mitigated through using afactor.

2. The possibility of qualifying for a supplier discount (perhaps as high as 5%of gross invoice value) for prompt payment that can be made following thefactoring of the invoice.

3. The use of professional credit management services often results in animprovement in the adherence of payment terms to the client – i.e. invoicesare paid more quickly. This means that the client is able to repay any pre-payment more quickly, and therefore reduces ‘interest’ charges.

When the above ‘benefits’ are considered against the ‘costs’ of the factoringservice element, factoring is arguably a competitive proposition – particularlyfor smaller businesses.

In Ireland, virtually all factoring is non-disclosed recourse, and therefore thefactor is really only providing credit without services. Therefore, they typicallycharge a negotiated flat annual fee to clients, rather than on a percentage ofinvoice basis.


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Table 5.5 Costs of Factoring Services

Recourse Non-recourse Invoice discountingCountryAustria 0.5% - 0.8% 1.0% - 1.4% 0.20% - 0.60%Belgium 0.1% - 0.5% 0.3% - 1.0% 0.05% - 0.25%Denmark 0.4% - 0.5% 0.5% - 0.7% 0%Finland 0.12% - 1.35% 0.01% - 1.2% 500 - 700 Euro per monthFrance 0.4% - 0.5% 0.6% - 0.8% 0.18% - 0.20%Germany 0.4% - 1.5% 0.6% - 2.5% -Greece 1.0% 1.0% - 1.5% < 1.0%Ireland Negotiated Fee Negotiated Fee Negotiated FeeItaly n/a n/a n/aNetherlands n/a n/a n/aPortugal n/a n/a n/aSpain 0.5% - 2.5% 0.5% - 2.5% n/aSweden 0.2% - 0.3% n/a n/aUK 0.75% - 2.0% 1.0% - 2.5% 0.25% - 0.75%


5.8 IMAGE AND PRODUCT UNDERSTANDING

Image and lack of product understanding were most commonly reported underboth the demand and supply side surveys as key constraints to marketdevelopment and expansion. There appear three components to image andunderstanding, which are:

q Perception of Inferior Product – reported that factoring has a negativeimage as it tends to be provided either by private companies, or specialisedbanking subsidiaries, with the latter either not owned by, or marketed as,the main business banks. Therefore, it is reported that advisers andcompanies tend to view it as an ‘inferior’ and more risky product.

q Lack of Product Understanding – this by advisers and companies alike.In fact our demand side survey of European SME RepresentativeAssociations, only 25% of respondents confirmed that factoring was wellknown to them and that they have looked at it in detail. The majority,75%, of respondents confirmed that they had only an ‘in principle’knowledge of factoring. Further, it was reported in particular that notenough advisers sufficiently understand the product to effectivelyrecommend it to their client companies. Therefore, companies notunderstanding the full tenets of the product tend to focus on giving up theirsales ledger and the possible downside implications thereof.


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q Perception by Clients Customers – as reported by several countries,factoring is often perceived to be finance of last resort – i.e. believing thattheir suppliers only turn to factoring when their banks have capped theircredit facility, which would indicate that the company might be in trouble,which could lead to seeking alternative suppliers. However, with banksentering the factoring market, and increasingly selling through their branchnetwork, it is expected that this will improve the ‘respectability’ of usingfactoring and overcome its current, often negative, perception.

As touched on above, many SMEs expressed a reluctance to consider giving upcontrol of their sales ledger to an external party. There are a number ofreasons why companies might think this way. Most common reasons relate tothe perception issues discussed above. Specifically, the perception of theircustomers to them being in financial difficulty – but also, the perception thatfactoring is more costly than alternative financing – and finally, issuessurrounding trusting the factor to forge and protect the relationship with thecustomer.


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6. STRUCTURE OF EUROPEAN FACTORING MARKETS

This section presents a series of analysis derived from the supply side studysurvey, which aims to give a picture of the structure of European factoringmarkets. It focuses on issues of market concentration, market entry andownership structures.

6.1 FACTORING PRODUCTS AND RELATIVE IMPORTANCE

Based on the given study definitions of factoring products (recourse, non-recourse, and invoice discounting) each survey respondent was asked toconfirm which products are offered in their respective countries. Broadly, allthree products are offered consistently across all countries. Only in Spain,where they offer a confirmation service, rather than invoice discounting (i.e.purchase ledger rather than sales ledger financing), and in Germany where legalimpediments prevent any real take up of recourse through factoring or invoicediscounting are there deviations.

6.2 NUMBER OF FACTORING COMPANIES

The number of factoring companies operating now, compared to 5 and 10years ago, in each member state is shown in Table 6.2.

Numbers in Austria, Finland, and Spain have remained about the same.

The UK demonstrates a relatively high number of new market entrants,reportedly a combination of smaller independent factors, but also integrationinto the market by mainstream financial institutions and branches of foreignowned factors.

The first factoring company in Greece was established in 1995, whereas thereare now seven operating companies. Germany and France have alsodemonstrated increasing numbers of new entrants.

In Italy, Belgium and Sweden the numbers of companies operating ‘now’ hasdeclined, reportedly for reasons of market concentration through mergers andacquisitions within the industry.


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The ‘EU-Total’ figues presented in Table 6.2 indicate a relatively static pictureof the number of factoring companies operating now, as opposed to 5 and 10years ago. However, excluding the merger activity in Italy, Belgium andSweden the picture becomes much more dynamic showing an increase of 55%,from 89 to 138, in new factoring companies operating now than there were 10years ago.

Table 6.2: Numbers and Growth of Factoring Companies

Country Total Now Total 5 Years Ago Total 10 Years AgoAustria 3 3 3Belgium 5 9 7Denmark 10 10 6Finland 4 4 4France 38 30 24Germany 16 12 11Greece 7 4 0Ireland 6 6 3Italy 45 65 80Netherlands n/a n/a n/aPortugal n/a n/a n/aSpain 19 20 18Sweden 9 12 15United Kingdom 35 27 20EU TOTAL 197 202 191EU TOTAL Ex. Italy,Sweden and Belgium

138 116 89

Source: GLE Study Survey Questionnaire 2002.Note: The statistics are based on membership data only, noting that many other smaller factors are notmembers. Nonetheless, members regularly account for at least 80% of the market (by business volume).

6.3 MARKET CONCENTRATION

In Table 6.3, we present a picture of market concentration within the factoringindustries in each member state. Across most member states the factoringindustries are highly concentrated with, typically, only 1 or 2 companiesaccounting for 50% of total market share by volume. In all of the moredeveloped markets, there shows a relatively high number of smaller factors, forexample, in the UK 26 companies make up only 20% of the market; in Italy thisis 39 companies, and in France 32 companies.

The typical high market concentration may be explained by one or more of thefollowing factors:


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q The relative fledgling state of factoring sector development in many countries;

q The internal economies of scale for factoring companies acting as barrier to new marketentry (e.g. high volume credit lines perhaps acting as a ‘natural’ barrier restricting newmarket entry to smaller independent factors which may lack access to funds forexpansion); and

q Other regulatory barriers restricting market entry in several countries, restricting marketentry to formally registered financial institutions – banks and non-bank financialinstitutions.

Growing market competition will have an impact on the future developmentand growth of the factoring sector across Europe. Specifically, we wouldconsider three main positive impacts emerging from competition, particularlycompetition from private / independent factoring companies:

1. Increased product innovation, through technology, offering betterquality, lower cost and more relevant services to client businesses. Thisis happening to some degree in the UK through intranet clientapplications.

2. Improved accessibility and relevance to servicing smaller businesseseither through better internal referral systems within banks thatrecognise the suitability and profitability of factoring subsidiaries, orthrough the growth of smaller independent factors operating at thefringes of the market, servicing those companies that bank-ownedfactors do not (as related to in Soufani, 2000).

3. Higher factoring volumes, points of access, understanding andmarketing of factoring products to all businesses – as firms compete formarket share, they will need to be more focused on businessdevelopment and marketing – thereby raising the awareness of factoringby businesses, and by business advisers.


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Table 6.3 Market Concentration in the EU Factoring Markets

Country No. of CompaniesAccounting for 50% ofTotal Market Volume

No. of CompaniesAccounting for 80% ofTotal Market Volume

No. of CompaniesAccounting for 100% of

Total Market VolumeAustria 1 2 3Belgium 1 2 5Denmark 2 4 10Finland 2 3 4France 2 6 38Germany 4 9 16Greece 1 3 7Ireland 1 3 6Italy 2 6 45Netherlands n/a n/a n/aPortugal n/a n/a n/aSpain 2 5 19Sweden n/a 4 9United Kingdom 4 9 35Source: GLE Study Survey Questionnaire 2002.

6.4 STRUCTURE OF OWNERSHIP OF FACTORING COMPANIES

There are typically three main types of factors. The factor can be affiliated witha:

q Commercial bank – or non-banking subsidiaries;

q Large industrial companies providing factoring in specialised markets; or

q Independent

In every reported case under this study, the majority of factoring companies areowned by banks and non-bank financial institutions. This is unsurprising giventhe rationale demonstrated in section 6.3 above, commenting on regulatoryrestrictions, and market economies of scale. Italy shows 45% of factoringcompanies being privately owned, demonstrating their historically particularreliance on large specialised industrial companies.

There are two themes emerging from ownership structure:


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q On the up-side, banks entering the market provide the necessary resources and skills toadvance and grow factoring services;

q On the down-side, as demonstrated by Soufani, 2000, banks tend to offer a standardisedapproach towards products and risk assessment, which results indicate that factoring tendsto be restricted to more established businesses, and businesses within certain sectors.

On balance, the general industry feeling is that factoring is an area where bankswill continue to engage, and indeed should be encouraged to engage.Certainly, factoring offers a viable alternative overdraft / loan financing to bankcustomers, thereby allowing banks to effectively service their clients in line withtheir sales related growth, rather than fixed asset related growth. This is animportant distinction for smaller businesses, and is discussed in more detail inSection 5.

Table 6.4 Ownership Structure of Factoring Companies

Country Banks Private Public ForeignSubsidiary

Austria 100%Belgium 80% 20%Denmark 60% 20% 10% 10%Finland 100%France X% X% X%Germany 50% 31% 19%Greece 100%Ireland 100%Italy 10% 45% 45%Netherlands n/a n/a n/a n/a n/aPortugal n/a n/a n/a n/a n/aSpain 90% 10%Sweden 56% 33% 7%UnitedKingdom

26% 31% 17% 26%

Source: GLE Study Survey Questionnaire 2002.Note: ‘Banks’ may be either operational departments of banks, or bank owned operating subsidiaries.


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6.5 GOVERNMENT INFLUENCE ON FACTORING

In determining the competitiveness of factoring relative to alternative forms offinancing, and any fiscal measures generally impacting at all on the factoringindustry, the study asked factoring associations to confirm if there are:

q Any subsidies affecting factors or clients;

q Any fiscal incentives affecting factors or clients;

q Any taxes affecting factors or clients; and

q Any other fiscal measures impacting on or affecting factoring services

Belgium reported a partial VAT recuperation by client businesses against costsof factoring fees, and a similar partial drawback scheme was reported inFrance. In Portugal, we understand that a 4% stamp duty is applied to thevalue of invoices that are factored.

However, these were the only fiscal measures identified by any of therespondents outside of common prevailing corporate taxation applied byMember States.

Therefore it appears as though factoring operates on a level competitiveplaying field to other alternative products – at least as far as government fiscalmeasures are concerned.


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7. SIZE OF EUROPEAN FACTORING MARKETS

In Chapter 6 we presented details of factoring market structure reported foreach EU Member State. Specifically, we considered issues of marketconcentration, market entry and ownership. In this chapter we consider issuesrelated to the size of the factoring markets in Europe. Analysis is presentedaccording to the following measures:

q Volume of Aggregated Factoring Turnover

q Factoring as proportion of GDP

q Factoring as proportion of Total Cash Flow financing

q Turnover desegregated by product

q Aggregated volume of domestic Vs international factoring turnover

q Domestic turnover by product type

q International turnover by product type

7.1 VOLUME OF AGGREGATED FACTORING TURNOVER

Table 7.1 presents data on aggregated factoring volumes for each EU MemberState over a three year period, and considers the respective rates of growth infactoring volume over the period.

There are clearly enormous volume differences between member states, with,for example, the UK and Italian markets (being volume of utilisation offactoring) being around 80 times bigger than Greece, and considerably largerthan the markets in Austria, Ireland, Belgium, Finland and Denmark. France asthe third largest market is still only around 50% of market size in either UK orItaly.

Later in this section we ‘benchmark’ these volumes against other economicmeasures of GDP and Cash Flow Financing, to show the relative scale andimportance of factoring in each respective country.


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Importantly, all countries demonstrate positive, and in many cases highlypositive, rates of growth in total factoring volumes over the period 1998-2000.The mean average rate of growth measuring 57% over the period – albeit withmany increases building from relatively low bases. The two largest markets,UK and Italy, demonstrate similar rates of growth of circa 46% over theperiod.

It is noted that these gains were made in years of low interest rates, whichperhaps gives an indication of the particular competitive and unique positionfactoring holds.

Table 7.1: Aggregate Factoring Volumes 1998-2000 (Euro Millions 2000 prices)

Country 2000 1999 1998 Rate of Growth 1998-2000Austria 2,275 2,007 1,832 24.2%Belgium 8,000 7,630 4,366 83.2%Denmark 4,050 3,360 2,894 39.9%Finland 7,130 5,630 5,230 36.3%France 52,450 53,100 44,255 18.5%Germany 23,483 19,984 20,323 15.5%Greece 1,500 850 596 151.7%Ireland 6,500 6,160 3,957 64.3%Italy 110,000 88,000 75,319 46.0%Netherlands n/a n/a n/a n/aPortugal n/a n/a n/a n/aSpain 19,500 12,530 9,936 96.3%Sweden 12,310 7,550 7,677 60.3%United Kingdom 123,770 103,200 84,255 46.9%EU TOTAL 370,968 310,001 260,640 56.9%

Source: World Factoring Yearbook 2001, BCR Publishing

7.2 FACTORING RELATIVE TO GDP

In considering the relative importance of factoring within each economy, wecompared factoring volumes to GDP volumes. This is shown below.


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Table 7.2 Factoring Relative to GDP by Member State

Country 2000 Factoringrelative to GDP

1999 Factoringrelative to GDP

1998 Factoringrelative to GDP

Growth in Factoringrelative to GDP from

1998 to 2000

Austria 1.11% 1.02% 0.97% 14.36%Belgium 3.22% 3.24% 1.95% 65.51%Denmark 2.33% 2.06% 1.88% 23.99%Finland 5.43% 4.67% 4.54% 19.74%France 3.73% 3.93% 3.41% 9.47%Germany 1.16% 1.01% 1.06% 9.32%Greece 1.22% 0.72% 0.55% 123.20%Ireland 6.28% 6.92% 5.12% 22.62%Italy 9.44% 7.94% 7.05% 34.03%Netherlands 3.96% 5.49% 5.03% -21.25%Portugal 7.80% 6.88% 5.51% 41.74%Spain 3.20% 2.22% 1.89% 69.39%Sweden 4.95% 3.32% 3.59% 37.91%UK 7.98% 7.54% 6.63% 20.44%AVERAGE 4.42% 4.07% 3.51% 33.61%

Source: 1) Factoring data, World Factoring Yearbook 2001, given in current millioneuro prices. 2) GDP data, Planistat, given in current million euro prices. See Annex 5

Unsurprisingly, factoring relative to GDP is higher in those countries wherefactoring is a more established and deeper market. In the most developedmarkets factoring relative to GDP in 2000 ranges from 9.44% in Italy, 7.98%in the UK, to 7.80% in Portugal. Clearly these show that factoring issignificant.

Importantly, in all markets, other than The Netherlands, the rate of growth offactoring relative to the rate of growth of GDP between 1998 and 2000, hasbeen significant, albeit in most cases starting from a low base. The meanaverage rate of growth of factoring relative to GDP across all member statesover the period is 33.61%.

Whilst we do not have data regarding rate of growth in bank overdrafts orloans, we can note that these impressive rates of growth in factoring did occurat a time of historically low interest rates in Europe. It might therefore bereasonable to suggest that factoring as a ‘product’ is valued by businesses formore than simply its financial element – i.e. the accompanying service elementoffered by factors.


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7.3 PERCEPTION OF FACTORING RELATIVE TO CASHFLOWFINANCING

With the exception of the UK, published statistical data on factoringrelative to total cash flow financing was not openly available. Therefore, inquestioning national factoring associations, we requested that they attemptto give a reasonable and qualified indication on their perceptions offactoring relative to total cash flow financing (understood as short termbank loans and bank overdrafts) – now – and in the medium term. Not allcountries felt able to respond to this question, but the results attained fromthose who did are indicated in the following table.

Table 7.3: Perception of Factoring Relative to Total Cash Flow Financing

Country Recoursefactoring

Non-recoursefactoring

Invoicediscounting

Total Factoring Other Cash FlowFinancing

2002 2007 2002 2007 2002 2007 2002 2007 2002 2007Austria n/a n/a n/a n/a n/a n/a 10.0% 10.0% 90.0% 90.0%Denmark 8.0% 12.5% 0.5% 0.5% 2.0% 2.0% 10.5% 15.0% 89.5% 85.0%Finland 7.0% 7.0% 3.0% 6.0% 10.0% 12.0% 20.0% 25.0% 80.0% 75.0%Greece n/a n/a n/a n/a n/a n/a 5.0% 5.0% 95.0% 95.0%Ireland n/a n/a n/a n/a n/a n/a 10.0% 10.0% 90.0% 90.0%Sweden 5.0% 10.0% - - - - 5.0% 10.0% 95.0% 90.0%UK 4.8% 3.0% 2.3% 2.0% 26.2% 35.0% 33.3% 40.0% 66.7% 60.0%Source: GLE Study Survey Questionnaire 2002

From the above table the conclusion can be drawn that only where there isalready a vibrant expanding factoring industry that can offer a full range ofservices without restrictions does the industry expect to have any expansioninto the cash flow market usage.

7.4 VOLUME OF FACTORING TURNOVER DISAGGREGATED BYPRODUCT

As shown in Table 7.4, the product mix has remained fairly constant over theperiod. However, the relative volumes of factoring turnover by product differmarkedly by country. For example, in 2000, 79% of total factoring volume inthe UK was attributable to invoice discounting and only 14% to recoursefactoring; whereas in Italy, volumes are split relatively evenly between recourseand non-recourse factoring.


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A likely answer to this relates to the development of factoring products in eachcountry, being specific to each country, for the simple reason that prevailinglaws and regulations regarding assignment of receivables in each country areunique and specific. Therefore, whilst each product is defined as broadly thesame, the specific process, application and interpretation of each product willhave variances across each country.

7.5 VOLUME OF FACTORED TURNOVER – DOMESTIC /INTERNATIONAL

The following table shows total factoring turnover disaggregated bydomestic and international factoring business. Clearly, domestic factoringbusiness is by far the most important, however, in several countries,international factoring is fairly significant, with Austria, Belgium andDenmark showing attributing around 30% of total factoring to internationalbusiness. Whilst not having the statistics to draw a robust conclusion, it isthought that, generally, those countries showing relatively high proportionsof international factoring are reflective of their respective levels of totalexport sales of companies relative to domestic sales – i.e. these countrieshave relatively small domestic markets and therefore companies are morereliant on exports, than say the larger domestic markets of France, Italy andthe UK.


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Table 7.4 Volume of Factoring Disaggregated by Product (1998-2000)

Country 2000 1999 1998

Recourse Non-recourse

Invoicediscounting


Invoicediscounting


Invoicediscounting

Austria 90% 7% 3% 90% 7% 3% 90% 7% 3%Belgium 50% 20% 30% 50% 20% 30% 50% 20% 30%Denmark 80% 1% 19% 81% 1% 18% 84% 1% 15%Finland 45% 20% 35% 45% 15% 40% 50% 5% 45%France 14% 56% 30% 14% 56% 30% 14% 56% 30%Germany 10% 90% - 10% 90% - 10% 90% -Greece 50% 15% 35% n/a n/a n/a n/a n/a n/aIreland 95% 5% - 95% 5% - 95% 5% -Italy 45.3% 54.7% n.d.% 49.9% 50.1% n.d.% 54.2% 45.8% n.d.%Netherlands n/a n/a n/a n/a n/a n/a n/a n/a n/aPortugal n/a n/a n/a n/a n/a n/a n/a n/a n/aSpain 13% 50% 37% 13% 49% 38% 14% 46% 40%Sweden 80% 10% 10% 85% 5% 10% 85% 5% 10%UK 14% 7% 79% 16% 7% 77% 17% 8% 75%Source: GLE Study Survey Questionnaire 2002


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Table 7.5 Volume of Factoring Turnover by Domestic / International (1999-2000)

2000 1999Country Total Domestic In

ternational

Total Domestic International

Austria 2,275 1,585 (70%) 690 (30%) 2,007 1,566 (78%) 441 (22%)Belgium 8,000 5,500 (69%) 2,500 (31%) 7,630 5,000 (66%) 2,630 (34%)Denmark 4,050 2,700 (67%) 1,350 (33%) 3,360 2,570 (76% 790 (24%)Finland 7,130 6,915 (97%) 215 (3%) 5,630 5,480 (97%) 150 (3%)France 52,450 48,250 (92% 4,200 (8%) 53,100 50,100 (94% 3,000 (6%)Germany 23,483 18,660 (79%) 4,823 (21%) 19,984 16,253 (81%) 3,731 (19%Greece 1,500 1,300 (87%) 200 (13%) 850 700 (82%) 150 (18%)Ireland 6,000 6,000 (100%) - 5,630 5,630 (100%) -Italy 110,000 105,000 (95%) 5,000 (5%) 88,000 84,000 (95%) 4,000 (5%)Netherlands n/a n/a n/a n/a n/a n/aPortugal n/a n/a n/a n/a n/a n/aSpain 19,500 18,870 (97%) 630 (3%) 12,530 11,900 (95%) 630 (5%)Sweden 12,310 10,160 (83%) 2,150 (17%) 7,550 7,350 (97%) 200 (3%)UK 123,770 117,700 (95%) 6,070 (5%) 103,200 98,000 (95%) 5,200 (5%)Source: World Factoring Yearbook 2001, BCR Publishing


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7.6 VOLUME OF DOMESTIC FACTORING BY PRODUCT

In the survey, respondents were asked to classify indicated volumes ofdomestic and international factoring business by product type. Table 7.6 showsthe product make up of domestic factoring business. Unsurprisingly, withdomestic factoring being the dominant business, these figures virtually matchthose given in Table 7.4 which showed a disaggregation of total factoringvolume by product type. This is not the case with international factoring, asshown in sub-section 7.7.

Table 7.6 Domestic Factoring Disaggregated by Product Type

2000 1999Country Recourse Non-

recourseInvoice

discountingRecourse Non-

recourseInvoice

discountingAustria 90% 5% 5% 90% 5% 5%Belgium 50% 20% 30% 50% 20% 30%DenmarkFinland 45% 20% 35% 45% 15% 40%France 9% - 18% 51% - 58% 24% - 39% 9% - 18% 51% - 58% 24% - 39%Germany n/a n/a n/a n/a n/a n/aGreece 50% 15% 35% n/a n/a n/aIreland n/a n/a n/a n/a n/a n/aItaly 47.1% 52.9% n.d.% 50.6% 49.4% n.d.%Netherlands n/a n/a n/a n/a n/a n/aPortugal n/a n/a n/a n/a n/a n/aSpain 14% 51% 35% 14% 52% 34%Sweden 80% 10% 10% 85% 5% 5%UK 13% 6% 81% 15% 7% 78%Source: GLE Study Survey Questionnaire 2002

7.7 VOLUME OF INTERNATIONAL FACTORING BY PRODUCT

As shown in Table 7.7, typically, non-recourse factoring is the main productoffered for international factoring. For example, Austria indicates non-recoursefactoring to account for 5% of domestic business, but 90% of internationalbusiness; similarly, Greece indicated 15% domestic, but 90% international.Most other respondents also showed proportionally far higher reliance on non-recourse for international business as opposed to domestic business.


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Most often international trade is carried out using the ‘Two Factor Method’ asshown diagramatically in Figure 7.1. Under this system the factor whose clientis the exporter remains responsible for all aspects of the services. The clienthas no contractual relationship with the import factor. The import factor willbe responsible to the exporter factor for the credit risk on the debtors in hiscountry and for the collections. This means the majority of internationaltrading using this method is non-recourse.

Figure 7.1: Process of International Factoring

It is arguable that the ‘Eurozone’, in the monetary policy sense, will havelittle effect on factoring of cross border trade within the EU primarily asany affects will arguably have already been captured under the ExchangeRate Mechanism. However, given the two factor system described above,the factoris not taking any exchange rate risks and therefore the only impact really ison the respective client businesses.

The major restriction on growth of international factoring is related to thedomestic market bias favoured by smaller businesses.

CLIENT

EXPORTFACTOR

DEBTOR

IMPORTFACTOR

COUNTRY COUNTRYGoods &

CopInvoic

Pre-Paymen

Payment

StatementsCollectionCopy

Payment StatuInformatio(Standardise


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Historically, most small businesses supply customers relatively local tothemselves. Naturally, the need to expand their market place to obtainincreased sales and resulting profits is a motivation for any growingbusiness. However, they will usually concentrate on expanding sales inmarkets they better understand – i.e. the broader domestic market. Hencefor this, and many other reasons, smaller businesses tend to export less thando larger businesses – and as confirmed in this report most factor clients aresmaller businesses.

Of course, over time as a result of the european free market, underpinned bythe single currency and resulting price transparancy, more smaller businessesare expected to engage in intra-EU cross border trade. As such, it could beargued that more smaller businesses will be seeking trade finance, and thereforethere could well be increased demand for international factoring services in thefuture – albeit starting from a relatively low base.

Table 7.7 International Factoring Disaggregated by Product Type

2000 1999Recourse Non-

recourseInvoice

discountingRecourse Non-

recourseInvoice

discountingAustria 10% 90% - 10% 90% -Belgium 50% 20% 30% 50% 20% 30%Denmark n/a n/a n/a n/a n/a n/aFinland 65% 35% - 70% 30% -France n/a n/a n/a n/a n/a n/aGermany - 100% - - 100% -Greece 5% 90% 5%Ireland n/a n/a n/a n/a n/a n/aItaly 17.9% 82.1% n.d.% 21.9% 78.1% n.d.%Netherlands n/a n/a n/a n/a n/a n/aPortugal n/a n/a n/a n/a n/a n/aSpain 1% 99% - 1% 99% -Sweden 100% - - 100% - -UK 10% 25% 65% 12% 28% 60%Source: GLE Study Survey Questionnaire 2002


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8. SUMMARY CONCLUSIONS

The primary objectives of this study were:

q An analysis on the use of factoring across the EU –relevance and incidence; and

q To examine the conditions of access to factoring forSMEs identifying any obstacles.

In Chapters 4 and 5 we presented issues specific to SMEs of relevance,incidence and access. In Chapters 6 and 7 we presented a detailed analysis ofthe European factoring markets generally.

In this section we draw together the lessons that emerge from the respectiveanalysis.

In Chapter 4 we considered issues of relevance of factoring to SMEs and theincidence of factoring by SMEs. Factoring supports cash flow financing but asa composite product it does this through the integrated provision of:

q Finance – noted as costs being comparative with alternative forms offinance;

q Professional Credit Management Services – accessing a quality ofprofessional service that would normally not reside within an SME and beprohibitively expensive to SMEs; and

q Credit Insurance – accessing this at effectively cheaper rates that an SMEcould do so through a direct application.

It is for the above reasons that factoring is argued as being relevant to SMEs –particularly over larger companies who would arguably have the internalresources to access professional credit management services, and creditprotection.

Therefore, factoring (recourse / non-recourse) is more relevant to SMEs than itis for larger businesses. Conversely, invoice discounting (which is aboutfinance rather than services) is more relevant to larger businesses than SMEs.

Having considered relevance to SMEs, we then considered incidence by SMEs.Table 4.1a showed that, on average, 91% of factoring clients were SMEs withannual turnovers of less than Euro 15mn. These figures support the claim thatfactoring is relevant to SMEs.


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However, data presented in Table 4.1 also shows that the actual number ofSMEs using factoring is very small relative to the total likely SME population.Therefore the question emerges: ‘if factoring is seen as relevant to SMEs whyis there a relatively small take up?’. This question is about ‘access’ to factoringby SMEs.

The question of ‘access’ to factoring was the focus of Chapter 5. This wasdealt with from the perspective of access generally and access specifically toSMEs against larger businesses. The following issues were considered in thiscontext:

q Risk Assessmentq Security and Collateralq Legal Frameworkq Business Sectorsq Size and Legal Form of Businessq Costs of Factoring Financeq Costs of Factoring Services

In each case it was shown that SME’s were not discriminated against in anyway against larger businesses. The only real barrier to access of factoringconcerns the relevance of factoring to certain types of business / sector.Factoring is suitable for ‘sell and forget’ businesses / products. Factoring is notsuitable for businesses / products which are characterised by stage or lumpypayment schedules, retentions. extended warranties or tie ins. This barrier toaccess is inherently related to the way factoring works i.e. the factoring productitself and as such cannot be addressed through any intervention withoutchanging the ‘essence’ of what factoring is and how it works.

In Chapter 5 we also considered the question of access with respect to variousdemand side issues related to product understanding and image. Two keyobservations were made:

1) Factoring and how to use as a product is generally not well understood bySMEs, nor indeed by advisers to SMEs.

2) Factoring has a lingering perception of being finance of last resort andtherefore may signal to buyers that their supplier is in financial difficulities.This is clearly related to point 1).

The improvement of understanding of the ‘factoring product’ – what it is, howit works, and how to work with it – and parallel improvement in the image of


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factoring are demand side weaknesses affecting access to factoring by SMEsand these can be addressed through public policy intervention.

In Chapters 6 and 7 we presented a detailed analysis of the European factoringmarkets generally. We reconsider some key messages here.

Factoring is a rapidly growing sector across Europe:

q There has been a 55% increase in the number of factoring companiesoperating in Europe over the past 10 years.

q There has been a 57% increase in aggregate factoring volumes between1998 and 2000.

The exact reasons behind this growth are difficult to confirm. However, onecan say that the sector has grown generally on the basis of ‘free market’economic / business opportunity, and specifically following increased entry andactivity in the factoring markets by banks – who bring market presence, accessto business customers, and the required financial resources.

There are no apparent legal, fiscal or other government obstacles to factoringmarket development. The only two ‘economic barriers to growth’ observedare:

Prevailing Economic and Business ConditionsThere is a clear link between availability of bank loans / overdrafts and the useof factoring – i.e. a squeeze by banks leads to more firms seeking alternativeoptions, being factoring. On economic downturn, banks would generally seekto reduce their risk exposure through reducing business credit, and in suchconditions, business could turn to factors.

However, it does not necessarily follow that factors will or can take all of this‘new’ business. Of course, if businesses are increasingly failing, then the factorwill consider this closely in its risk assessment procedures.

A similar argument can be made in times of relative economic vibrancy, wherebusinesses have access to increased sales opportunities, but require increasedcredit facilities to service these orders. For reasons touched on in this report,banks may not be well placed to meet rapid and increasing demands forworking capital through overdrafts (re: issues of security). Therefore, under‘boom’ conditions businesses might also be looking away from banks toalternative sources of finance that can service their needs in line with increasedsales volumes.


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Economics of ScaleThere is a natural barrier to market entry for factoring – being the high volumesof capital required to advance to clients. This can restrict entry of firms, butalso, growth of factoring firms – we refer here particularly to non-bank ownedfactors.

Overall, market growth is primarily supply driven and the public policychallenge is to stimulate the demand side to meet / keep up with supply.

ANNEX 1

Analysis of Use of Factoring – ETD/00/503408 – Revised Draft Final Report, 02/03

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ANNEX 1:

SURVEY RESPONDENT ORGANISATIONS’ CONTACTS

AUSTRIA

Contact Ms. Waltraud GruberOrganisation Intermarket Factoring BankPhone +43-1-71765-ext 225Fax +43-1-7132855Email [email protected]

Contact Ms. Regina ClearyOrganisation Factorbank AGPhone +43-1-50678-0FaxEmail [email protected]

Contact Mr. Leonfried Binder-DegenschildOrganisation Factorbank AG (Chairman of Austrian Factoring

Association)Phone +43-1-50678-0FaxEmail

BELGIUM

Contact Mr. Geert VannerumOrganisation IFB International FactorsPhone +32-2-6453911Fax +32-2-6453999Email [email protected]

Contact Mr. FosseprezOrganisation FortisPhone +32-2-6453911Fax +32-2-6453999Email [email protected]

DENMARK


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Contact Ms. Helle HolstOrganisation Midt FactoringPhone +45-9660-1100Fax +45-9660-1101Email [email protected]

FINLAND

Contact Mr. Reima LettoOrganisation Finnish Bankers AssociationPhone +358-9-4056120Fax +358-9-40561291Email [email protected]

FRANCE

Contact Mr. Antoine de ChabotOrganisation Association Française des Sociétés Financières (ASF)Phone +33-1 53 81 51 65FaxEmail [email protected]

Contact Mr. Jean-Marc LacanOrganisation FactofrancePhone +33146357044Fax +33146356912Email [email protected]

Contact Ms. Sandra GrandOrganisation EurofactorPhone +33-1-40808569Fax +33-1-40808554Email [email protected]


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GERMANY

Contact Dr. Ulrich BrinkOrganisation Deutscher Factoring - Verband e.V.Phone +49 6131 28 77 070Fax +49 6131 28 77 099Email [email protected]

Contact Ms. Barbara KohlOrganisation Deutscher Factoring-Verband e.VPhone +49-6131-2877070Fax +49-6131-2877099Email [email protected]

GREECE

Contact Ms. Florence IndianouOrganisation ABC FactorsPhone +301-0-7258180Fax +301-7258190Email [email protected]

IRELAND

Contact Mr. Declan MoranOrganisation Bank of IrelandPhone +353-1-6140302FaxEmail [email protected]

Contact Ms. Ann HoranOrganisation Bank of IrelandPhone +353-1-6386241FaxEmail


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ITALY

Contact Dr. Nicoletta BuriniOrganisation AssifactPhoneFaxEmail [email protected]

Contact Dr. Alessandro CarrettaOrganisation AssifactPhoneFaxEmail [email protected]

NETHERLANDS

Contact Mr. Carlo JussenOrganisation FortisPhone +31-73-646-7515Fax +31-73-646-7810Email [email protected]

Contact Mr. Dion van den WijngaardOrganisation FortisPhone +31-73-646-7515Fax +31-73-646-7810Email [email protected]

Contact Mr. Jeroen KohnstammOrganisation Factors Chain InternationalPhoneFaxEmail [email protected]


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PORTUGAL

Contact Ms. Margarida FerreiraOrganisation Association Portuguesa de Factoring (APEF)Phone +351-21-311-0444FaxEmail [email protected]

Contact Mr. Artur PereiraOrganisation Association Portuguesa de Factoring (APEF)Phone +351-2-26191600FaxEmail [email protected]

SPAIN

Contact Ms. Blanca GarciaOrganisation Association Espanola de FactoringPhone +34-9-17814400Fax +34-14314646Email

Contact Ms. Cristina BodiOrganisation Association Espanola de FactoringPhone +34-9-17814400Fax +34-14314646Email [email protected]

SWEDEN

Contact Mr. Josta FischerOrganisation Swedish Bankers AssociationPhone +468-4534460Fax +468-4534415Email [email protected]


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UNITED KINGDOM

Contact Mr. Robin ClarkeOrganisation Factors and Discounters AssociationPhone 020-83329955FaxEmail [email protected]

Contact Mr. Paul HancockOrganisation Bank of AmericaPhone 020-78095801FaxEmail [email protected]

Contact Mr. Michael BickersOrganisation BCR PublishingPhone +44-20-8466 6987Fax +44-20-8466 0654Email [email protected]

ANNEX 2

SURVEY QUESTIONNAIRE

ANALYSIS OF THE USE OF FACTORING SERVICES INEUROPE – A STUDY FOR THE EUROPEAN COMMISSION

«COUNTRY»

SECTION 1: GENERAL MARKET CONDITIONS

1.1 Please Provide a Brief Written Synopsis on the Origins and General Development of theFactoring Industry in «Country».

(Write here or Reference any Attachment)

1.2 Please Provide a Brief Written Synopsis on the Prevailing Economic Environment and ItsImpact on Factoring Services in «Country».


1.3 Please Provide a Brief Written Synopsis on the Market Performance Trends and Supply of

Factoring Services over the past Five Years in «Country»


1.4 Please Provide a Brief Written Synopsis on the Short to Medium Term Future Growth andMarket Development Outlook for the Supply of Factoring Services in «Country»


SECTION 2: FACTORING PRODUCT SPECIFICATIONS

This study is using the following product definitions:

Product Study DefinitionRecourse Factoring Where a factoring company taking responsibility for their clients’ credit

management but retains the right to seek full recourse from the client forany bad debts. The client may buy credit insurance separately but nocover is provided by the Factor.

Non-Recourse Factoring Where a factoring company takes responsibility for their clients’ creditmanagement and offers the client full credit cover against the eventualityof the factor being unable to secure full payment of factored invoices.Such cover may or may not be provided directly by the factor.

Invoice Discounting Where the client continues to collect its own debts from customers, eventhough it has received an advance from an Invoice Discounter. Receiptsare transferred to the Discounter and then returned, less the initialadvance and charges.

Note: For the purposes of this study, we do not wish to differentiate between ‘disclosed’ or ‘non-disclosed’ for any of the above products.

2.1 Against the Above Definitions, please confirm which products are available in «Country» –(please mark with an ‘X’).

Yes NoRecourse FactoringNon-Recourse FactoringInvoice Discounting

2.2 What is the Main Alternative Cash Flow Financing Products Available in «Country»

Product DescriptionBank Overdraft

Bank Loans

Other 1 (please specify)

Other 2 (please specify)

2.3 Please Rank the Current and Potential Relative Volume Importance of Cash FlowFinancing Products in «Country»

Product Percentage of Total MarketCurrent

Estimated Percentage ofTotal Market in 5 years Time

Recourse Factoring % %Non-Recourse Factoring % %Invoice Discounting % %Bank Overdrafts % %Other 1 (please specify) % %Other 2 (please specify) % %TOTAL CASH FLOW FINANCING 100% 100%

2.4 Please Rank the Current and Potential Relative Volume Importance by Product inFinancing International Trade in «Country»

Product Percentage of TotalMarket Current

Estimated Percentage ofTotal Market in 5 years

TimeRecourse Factoring % %Non-Recourse Factoring % %Invoice Discounting % %Letters of Credit % %Other 1 (please specify) % %Other 2 (please specify) % %Other 3 (please specify) % %Other 4 (please specify) % %TOTAL INTERNATIONAL TRADE FINANCE 100% 100%

2.5 Please Indicate the Average Costs of Money Advanced by Product - i.e. Interest Rates -(typical within a range) in «Country»

Product Typical Cost of Money Advanced (Base Rate + X%)Example Format EURO LIBOR + Range 1%-3%Recourse FactoringNon-Recourse FactoringInvoice Discounting

2.6 How Price Competitive is Money Advanced through Factoring to the Costs of other CashFlow Finance Products (say, Overdrafts) in «Country» (please indicate with an ‘X’)

�� Very Competitive _____ (Cost of money advanced through Factors is cheaper than alternative sources)�� Competitive _____ (Cost of money advanced through Factors is about the same as alternative sources)�� Not Competitive _____ (Cost of money advanced through Factors is more expensive than alternative sources) 2.7 Please Indicate the Average Costs of Factoring Service Fee by Product in «Country» Product Typical Cost Factoring Fee (excluding cost of money) as

Percentage of Invoice Value – Give a Range if Necessary Recourse Factoring Non-Recourse Factoring Invoice Discounting

SECTION 3: FACTORING INDUSTRY INFORMATION 3.1 How Many Factoring Companies is there Operating in «Country» by Year � Total Current Number � Total Number 5 Years Ago � Total Number 10 Years Ago

3.2 What has been the Pattern of Market Concentration been Like in «Country» over the PastFive Years (please indicate with an ‘X’)

� The Total Number of Factoring Firms has Increased Markedly ____� The Total Number of Factoring Firms has Increased Slightly ____� The Total Number of Factoring Firms has Remained About the Same ____� The Total Number of Factoring Firms has Reduced the Mergers / Acquisitions ____� The Total Number of Factoring Firms has Reduced through Lack of Business ____

3.3 Please Indicate the Total Number of Factoring Companies That Account for the IndicatedPercentages of Total Market Volume Share in «Country» Presently

Market Share Number of Firms50%80%100% (total from Question 3.1)

3.4 Please Indicate the Current Ownership Structure of Factoring Companies in «Country»

Organisation Type Percentage OR Actual Number of Total Factoring CompaniesBanksNon-Bank FinancialPrivatePublicForeign Subsidiaries

SECTION 4: FACTORING INDUSTRY STATISTICS

4.1 Please Indicate the Likely Current Market Distribution of ALL Factoring Clients by Size ofClient Turnover (either by actual numbers of clients, OR estimated percentage of total clientsfalling within defined bands)

Client Annual Turnover Band(EUROS)

Actual Number of Clients Percentage of Total Clients

0 - 500,000500,001 – 2,000,000

2,000,001 – 5,000,0005,000,001 – 15,000,000

>15,000,000TOTAL 100%

4.2 The Following Table gives Total Factored Volumes in «Country» for 2000, 1999 and 1998 aspublished in the World Factoring Yearbook 2001. Please indicate the relative percentage ofvolume by indicated product type

Total Factored Volume(Millions Euros)

Recourse Factoring Non-Recourse Factoring Invoice Discounting

YEAR

2000 «Total_Factored_Volume_2000»

% % %


% % %


% % %

4.3 The Following Table gives Total DOMESTIC Factored Volumes in «Country» for 2000 and1999 as published in the World Factoring Yearbook 2001. Please indicate the relativepercentage of volume by indicated product type

Total DOMESTICFactored Volume(Millions Euros)


YEAR2000 «Domestic_Factoring_2

000»% % %

1999 «Domestic_Factoring_1999»

% % %

4.4 The Following Table gives Total INTERNATIONAL Factored Volumes in «Country» for2000 and 1999 as published in the World Factoring Yearbook 2001. Please indicate therelative percentage of volume by indicated product type

TotalINTERNATIONAL

Factored Volume(Millions Euros)


YEAR

2000 «International_Factoring_2000»

% % %

1999 «International_Factoring_1999»

% % %

4.5 Please Indicate the Distribution of Total Factoring Turnover by Business Sector (pleasespecify sector and relative proportion of the total)

Business Sector Proportion of Total Factored Volume

Sector 1 (specify) %








TOTAL 100%

SECTION 5 LEGAL FRAMEWORK, BARRIERS AND OPPORTUNITIES FORMARKET DEVELOPMENT

5.1 Please Describe Any Government Fiscal Measures Affecting the Factoring Industry

Fiscal Measure Y/N Describe

Subsidies affecting Companies

Subsidies affecting Factors

Incentives affecting Companies

Incentives affecting Factors

Taxes affecting Companies

Taxes affecting Factors

Other Fiscal 1

Other Fiscal 2

5.2 Please Indicate any Typical Exclusions from Factoring Services

Issue Exclusions

Business Sectors (for example: Construction)

Legal Form of Business (for example: Partnerships / Sole Traders)

Size of Turnover (for example: micro businesses < Euro 50,000)

Years of Trading History (for example: start ups / early stage businesses)

Nature of Goods / Services Sold (for example: new technologies requiring testing before payment)

Other 1 – please specify



5.3 What are the Barriers Affecting Growth of the Factoring Industry in «Country» – andindicate actions for mitigating the barrier. (Barriers could be Legal, Regulatory, NegativePerception of the Industry by Business and Business Advisers or others)

Barrier to Factoring Growth Actions Required to Overcome Barrier

THANK YOU FOR COMPLETING THISQUESTIONNAIRE

PLEASE RETURN ELECTRONICALLY (PREFERABLE), BY FAX, OR PHYSICALLY TO:

Mr. David ElliottStudy ManagerGreater London Enterprise InternationalEmail: [email protected]: +44-20-79401525Fax: +44-20-74031742Physical and Postal Address: 28 Park Street, London SE1 9EQ, United Kingdom

ANNEX 3

C:\TEMP\Annex 3 - Demand Side Questionnaire.doc

1. “Factoring“ as a source of finance

� is unknown to me� is known to me in principle but I have not looked at it in detail� is well known to me, I have already looked at it in detail or know enterprises where factoring is being used

2. What is your opinion concerning the use of factoring by SMEs (small and medium-sized enterprises)?

� SMEs tend not to be aware of factoring and therefore it is hardly ever used� in general SMEs are aware of factoring but it is hardly ever used� a considerable number of SMEs are using factoring� difficult to say

3. Do you believe that factoring is a useful and useable source of finance for SMEs?

� no � yes, for all SMEs � yes, but mainly for larger SMEs (50 or more employees)

� difficult to say

4. What is your opinion concerning the future use of factoring by SMEs?

� will not change � will decrease � will increase � difficult to say

5. What is your opinion with regard to the cost of factoring for SMEs?

� factoring is a comparatively cheap source of finance (compared to bank loans or overdrafts)� costs for factoring roughly correspond to similar sources of finance� factoring is too expensive for SMEs� difficult to say

6. Is your organisation planning measures aimed at increasing the use of factoring by SMEs or have such measuresalready been implemented in the past?

� no, and in principle we don’t believe that this is necessary� no, but we believe that in principle such measures make sense

� yes (please explain) ____________________________________________________________________________

______________________________________________________________________________________________

______________________________________________________________________________________________

ANNEX 4


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ANNEX 4:

DEMAND SIDE SURVEY ORGANISATIONS’ CONTACTS

COUNTRY ORGANISATION PHONE FAXBelgium UEAPME +32 2 2307599

+32 2 2307964+32 2 2307858+32 2 2307628

+32 2 2307861

Belgium UNICE +32 2 2376511 +32 2 2311445Belgium European Small Business Alliance +32 2 6396231 +32 2 6449017Germany Zentralverband des Deutschen Handwerks and

Bundesvereinigung der Fachverbande des DeutschenHandwerks

+49 228 985240 +49 228 9852411

Germany Bundesverband der Selbstandigen/DeutscherGewerbeverband e.V.

+49 30 2804 9121 +49 30 28049111

Germany/UK The German Industry Association in the UK +44 20 72337816 +44 20 78219488Austria Wirtschaftskammer Osterreich +43 1 50105-0 +43 1 50206275

+43 1 50105250Belgium Comite National Belge des Petites et Moyennes Entreprises +32 2 2380411 +32 2 2309354Denmark Organisation for dansk Handvaerk og Mindre Industri +45 33 932000 +45 33 320174Spain Confederacion Espanola de la Pequena y Mediana Empresa +34 91 4116161 +34 91 5645269Finland The Federation of Finnish Enterprises +358 9 229221 +358 9 22922980Sweden Foretagarnas Riksorganisation +46 8 4061700 +46 8 245526


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France Assemblee Permanente des Chambres de Metiers +33 1 44431000 +33 1 47203448France Union Professionelle de l'Artisanat +33 1 47633131 +33 1 47633110France Confederation Generale des Petites et Moyennes Entreprises +33 1 47627373 +33 1 47730886Greece Confederation Generale des Petits et Moyennes

Entrepreneurs, Artisans et Commercants de Grece+30 210 3816600 +30 1 3820735

Italy Confederazione Generale Italiana dell'Artigianato +390 6 703741 +390 6 70452188Ireland Irish Small and Medium Enterprises Association +353 1 6622755 +353 1 6612157Ireland Small Firms Association +353 1 6601011 +353 1 6601717Netherlands Koninklijke Vereniging MKB-Nederland +31 152 191212 +31 152 191414Portugal Associacao Industrial Portuguesa +351 21 3601000 +351 21 3639047UnitedKingdom

Forum of Private Business +44 1565 634467-9 +44 1565 650059

UnitedKingdom

The British Chambers of Commerce +44 20 75652000 +44 20 75652049

Belgium Fédération des Chamberes de Commerce et d’Industrie deBelgique

+32 2 2090550 +32 2 2090568

Denmark The Danish Chamber of Commerce +45 33 950500 +45 33 325216Finland The Central Chamber of Commerce of Finland +358 9 696969 +358 9 650303France Assemblée des Chamberes Françaises de Commerce et

d’Industries (ACFCI)+33 1 40693700 +33 1 47206128

Germany Deutscher Industrie-und Handelskammerstag (DIHT) +49 30 20308-8 +49 30 20308-1000Greece Union of Hellenic Chambers of Commerce +30 2 1 0 3632702 +30 2 1 0 3622320Ireland The Chambers of Commerce of Ireland +353 1 6612888 +353 1 6612811Italy Unione Italiana delle Cammere di Commercice, Industria,

Artigianato e Agricoltura (UNIONCAMERE)+390 6 47041 +390 6 48903963

Netherlands Vereniging van Kamers van Koophandel en Fabrieken in +31 348 426911 +31 348 421231


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NederlandPortugal Associacao Comercial de Lisboa, Camara de Commercio e

Industria Portuguesa+3512 1 3224050 +3512 1 3224051

Spain Consejo Superior de Camaras Oficiales de Commrcio,Industria y Navegación de Espania

+34 91 5906900 +34 91 5906908

Sweden Svenska Handelskammarförbundet +46 8 55510036 +46 8 56631636

ANNEX 5


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ANNEX 5:

ECONOMIC AND FACTORING STATISTICS

GDP For EU Member States from 1998-2000 (Millions of Euros - Current Prices)

Country 2000 1999 1998

Austria 204842.336 196657.638 188645.607Belgium 248336 235538 224311.622Denmark 173889.029 163215.932 154068.639Finland 131229 120485 115256.044France 1404775.008 1350159.081 1297574.443Germany 2025500 1974300 1916370.032Greece 122881.288 118007.333 108977.58Ireland 103470.161 89029.239 77240.215Italy 1164766.794 1108497.42 1068947.335Netherlands 401089.073 373663.504 351648.178Portugal 115261.56 100713.677 108216.683Spain 608787 565483 525436.296Sweden 248478.897 227606.698 213701.77United Kingdom 1550364.41 1368181.439 1271085.139Source: Extraction date: Fri May 03 18:40:34 2002

Extraction made by: Eurostat Data Shop Luxembourg4, rue Alphonse Weicker, B.P. 453 ,L-2014 Luxembourg


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Total Factoring Volumes For EU Member States from 1998-2000 (Millions of Euros -Current Prices)

Country 2000 1999 1998

Austria 2,275 2,007 1,832Belgium 8,000 7,630 4,366Denmark 4,050 3,360 2,894Finland 7,130 5,630 5,230France 52,450 53,100 44,255Germany 23,483 19,984 20,323Greece 1,500 850 596Ireland 6,500 6,160 3,957Italy 110,000 88,000 75,319Netherlands 15,900 20,500 17,702Portugal 8,995 7,450 5,545Spain 19,500 12,530 9,936Sweden 12,310 7,550 7,677UK 123,770 103,200 84,255Source: World Factoring Yearbook 2001, BRC Publishing

analysis of use of factoring

Documents

factoring relative

use of factoring

factoring products

recourse factoring

incidence of factoring

roleof factoring

role of factoring

costs of factoring finance