FACTORING MARKET IN GERMANY

Gargi Bohra862

INTRODUCTION Factoring is a financial transaction in which a business

sells its accounts receivable i.e. invoices to a third party, called a factor, at a discount.

The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights associated with the receivables.

When factoring a company sells its receivables from deliveries of goods and services to its customers continuously to a factoring institution. 

In this way, the company gets immediate liquidity directly from his debts. The Factor checks before signing the contract and the ongoing creditworthiness of the customer and takes under an agreed limit, the full risk of default. 

 With immediate liquidity obtained by factoring a factoring company may also procure-use income in purchasing because discounts and special rates can be used. The factoring institutions secured failure protection (so-called Delkredereabsicherung) and regularly updated information about the creditworthiness of each customer (the debtor) ensure secure distribution channels for factoring user enterprise. 

The outsourcing of claims management provides administrative relief, especially in SMEs. The sale of receivables reduces the balance and leads to better balance sheet ratios, an increasingly important argument against banks in times of "Basel II." 

It is not surprising that factoring is already more than 30 industries daily used form of business financing. Among the most important factor customers currently include trade and commission trade, metal processing, food, beverage, manufacturing of machined products, engineering, manufacturing, production of chemical products, transport equipment, electronics / electronic devices and paper, publishing and printing .

Especially the wide range of the middle class still has considerable potential to use factoring as an alternative and attractive form of business financing.

THE FACTORING MARKET

The German factoring market shows stable growth due to a positive business climate, a rising acceptance of factoring and a still high market potential, penetration rate in Germany of 3.1% of GDP is still below European average.

The German Factoring Association is Deutscher Factoring-Verband e.V. (DFV) with more that 25 players who are a part of the association.

The factoring market in Germany is not only varied due to its diversified client and debitor industries, but also due to the different forms of factoring which are on offer.

Mostly, these are adapted to the individual needs and wishes of the clients, such as the amount to be financed, the maturity and collection period, the risk mitigation, the transfer of the debt management and other services offered by the factoring company.

Inhouse Factoring: With this form of factoring, the debt management remains with the factoring client who acts as escrow for the factoring company. The factoring company assumes the financing and full risk cover (for the delcredere/default case). Hence, this form of factoring is suitable for those clients who dispose of a reliable debt management of their own.

Standard- or Full Service-Factoring: This form of factoring includes the factoring company financing according to turnover as well as assuming the full risk cover (for the delcredere/default case) and the debt management.

Maturity Factoring: In the case of this form of factoring, the factoring client takes advantage of the full risk cover and debt management services without receiving immediate cash payment for the sold receivables. Maturity factoring makes financial planning easier for the factoring client as certain payment dates can be agreed upon with the factoring company. This planning reliability forms the integral part of the financing effect of this form of factoring.

Intragroup turnovers, turnovers from receivables which have not been bought and the refinancing of other factoring companies are comprised in the category "other forms of factoring".

INDUSTRY ENVIRONMENT

In 2009 Germany experienced the sharpest drop of its GDP since the 1930s, a decrease of 5% compared with the previous year.

Being heavily dependent on exports, which account for one third of its GDP, Germany was initially affected more severely than other nations by the global economic downturn. This was due not only to the sharp decline in world trade, but also because it specialises in sectors that were among the worst hit, such as auto manufacturing, machinery and metal production. 

But now, with signs that those sectors and global trade are gradually returning to normal, Germany may benefit more than other economies. Most countries have moved out of recession, trade is growing sharply and companies are investing once again. As a result, foreign orders for products made in Germany have leapt. German industrial orders are increasingly expanding and are now significantly higher than last year. 

At the same time companies are starting to stock up their warehouses with the semi-finished and finished products they had run down during the last year. As worldwide demand recovers, these inventories will grow again, helping to revive economic activity. 

In addition, companies will be more cautious about investing than they were in previous recovery phases, because the banking sector is still beset by problems and has not yet given up its restrictive funding policy.

Hence, it will remain difficult for companies to acquire fresh credit. Many of them have been so hard hit by the slump in sales revenues in 2009 that they lack the cash to finance their investments themselves and need to look for alternative funding sources. So the economy remains vulnerable, due amongst other things to a lack of funding supply from the banking sector. 

REGULATORY ENVIRONMENT

At the end of December 2008, the Annual Tax Act 2009 was passed. It contained amendments to a number of laws including the German Banking Act.

As a result of these changes, factoring companies are now under the supervision of the German Federal Financial Supervisory Authority (BaFin).

This change in regulatory law is intrinsically linked to a change in German business tax law which now grants factoring companies a business tax privilege similar to that already granted to banks.

The introduction of the regulatory requirements for factoring companies imposes several restrictions and demands which are completely new to most factoring companies.

The new regulatory requirements may lead to a certain level of consolidation in the factoring market. 

MARKET PERFORMANCE AND SUPPLY 

Currently 25 factoring companies are members of the German Factoring Association (DFV) representing more than 90% of the market.  

The DFV no longer publishes the market shares of individual factoring companies. The estimated market share of the top three factoring providers amounts to around 60%, and the top ten to around 91%. Growth rates amongst the top ten factoring companies vary between +39% and -43%.

The decrease of factoring turnover reflected the downturn of German economy last year and the slumped turnovers of existing clients.

But the negative impact of the economic crisis on existing factoring business was partially absorbed by the rising demand for factoring generating new business.

Within only one year, the number of customers grew remarkably from about 5,450 in 2008 to 8,840 in 2009, an increase of 62%, as reported by the DFV. 

The reason behind this development is the fact that more and more medium sized enterprises without access to the capital market are supplementing or substituting the restrictive bank credit supply by other funding sources, such as factoring. And they see the funding of their receivables as a very flexible finance alternative, especially in today’s unstable economic situation. 

Despite the decrease in factoring turnover, the factoring-ratio (the ratio between the total volume of receivables bought by factoring companies and the GDP) rose by 0.4% to 4.0% confirming the positive trend of increasing market penetration - even during the crisis. 

Clients from more than 30 industries are using factoring. According to the DFV, the key industries in 2009 were trade, food and nutrition, metal products manufacture, machine construction, electronics and electronic components, services, chemical product manufacturing, metal production and processing, paper, publishing and printing, other manufacturing industries and the health service sector.

Industries that are dependent on export trade were particularly affected by the economic crisis and suffered the highest declines in factoring turnover, e.g. metal production and processing and the automotive industry. 

THE YEAR 2012

2012 turned out as another successful year for the German factoring industry.

From the factoring clients’ point of view, factoring is still very much in demand. This is illustrated by the number of factoring clients, which rose to approximately 17,100, a new maximum and notable increase by 17.12% in comparison to 2011.

Factoring has therefore established and embedded itself as an instrument to finance means of production and to collateralise and safeguard against risks, especially in the SME sector.

The factoring ratio (referring to the ratio between the total of outstanding balances bought by the factoring companies associated in the German Factoring Association and the GDP) dropped just below the magical 6%-hurdle (5.95%).

Despite this slight decrease, the turnover of the factoring companies associated in the German Factoring Association once more corresponds to approximately 6% of the total German GDP. This figure clearly illustrates the relevance which factoring by now holds in the German economy.

The top 5 of the most important key industries in factoring remained unchanged: Trade and trade negotiation, services, manufacturing of metal objects and machine construction, the food/nutrition industry and metal production and processing are still dominant. Remarkable losses were noted in the textile and clothing industry as well as in the production of furniture, jewelry, etc. (down by three degrees, respectively), whereas the transport and telecommunications sector went up four degrees 

FUTURE TRENDS

The DFV reported that due to the continuing increase in business from new customers, more than 43% of its members expect good or very good business development during the first six months of 2013.

With regards to the future development, the members of the German Factoring Association have a nearly unchanged optimistic view of the year 2013: Just under 67% of the members expect at least a “good” development, 33% predict an at least “satisfactory“ development of the business.

Despite this positive prognosis, 2013 might once again be a rather challenging year for the German factoring industry for several reasons.

In the aftermath of the recession, the unstable economic situation typically bears the risks of liquidity deficits and increasing insolvencies among financially stricken companies.

Hence, factoring companies cannot yet relax their risk management and monitoring efforts. Some factoring companies without a strong capital base may also continue to face refinancing problems and suffer declining margins. New factoring business may still struggle to make up for the eroded turnovers of their existing client portfolios. 

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