Factoring and commercial finance growing in the UK and EU

Funding gap widens in the UK between manufacturing SMEs and larger companies.

Factoring and commercial finance has provided €170 billion in funding to 164,000 businesses, according to the EU Federation for the Factoring Industry (EUF). These businesses have a combined turnover of €1.37 trillion, making up 10% of the EU’s Gross Domestic Product (GDP). The companies surveyed were mainly from sectors like manufacturing, services and distribution.

Factoring and commercial finance are alternatives to more traditional forms of funding, like bank loans.

“FCF can provide a user with proportionately more funding than other sources, whilst for the provider the advance is more secure than the alternatives of traditional lending,” said John Gielen, an independent Chairman on behalf of the EUF Executive Committee. However, he continues, “the EUF believes the solutions are still not used to anything like their full potential.”

The EUF demonstrated low FCF provision rates compared to bank loan impairment rates, with 2014 rates in low-risk countries at 0.09% when funded through FCF compared to 0.32% when funded through bank loans. Meanwhile, rates in high-risk countries were 0.43% when financed through FCF, compared to 1.6% when funded through bank loans.

As of January 2016, the EUF estimates that factoring and commercial finance has grown by 6.19% year-on-year in the UK, and by 20.14% in Ireland.

The EUF consists of trade members like the Asset based Finance Association (ABFA) in the UK and Ireland. The ABFA estimates that SME manufacturers averaged 67 days on payment in 2015, whereas larger companies waited for an average of 38 days.

“Late payment of invoices and other poor payment practices have a significant impact on the UK’s competitiveness and ability to attract further investment to the sector,” said Jeff Longhurst, Chief Executive of the ABFA.