Global factoring volumes grew by around 3.6% in 2023, reaching nearly €3.8tn, according to statistics from FCI, the global factoring industry association. While a healthy figure, it was a sharp decline from the explosive double-digit growth seen in 2021 and 2022. GTR speaks to FCI secretary general Neal Harm about why growth has settled and the hopes for factoring expansion in Sub-Saharan Africa.

 

GTR: The 2023 full-year factoring statistics show relatively modest growth, after a couple of years of very strong acceleration. Why is that?

Harm: Factoring will always follow the growth – or decline – of trade. In 2023, merchandise trade fell just over 4% while factoring grew over 3%. Factoring as a vehicle to support trade grew relative to trade. In global terms, the statistics reflect that the whole world is resetting itself after the Covid-19 pandemic. In 2017-19 we had pretty good growth, not just with factoring, but globally. And then the pandemic hit, and everything just came to a halt within 90 days. Even in some of our statistics, you can see where payments just globally came to a halt, not just factoring.

Then, as we were in the pandemic, people started to realise where they can move their resources to in order to continue doing business – and all of a sudden, the business started to pick up. As we started coming out of the pandemic, those areas that had built those resources just took off. Everyone wanted to get back into business. Now, I think what we’re seeing is things going back to normal. We’ve got some markets that pulled back quite a bit and went negative, we have some markets that kind of flatlined, and some where we’re still continuing to see some of that legacy growth that came out of the pandemic. Overall, it’s normalising, but we have a way to go and we’re going to still see a couple of little bumps up and down in different markets.

 

GTR: One market in which factoring appears to be only just starting to take off is Sub-Saharan Africa. In the last couple of years, a model law on factoring developed by the African Export-Import Bank has been implemented in several Sub-Saharan African countries that didn’t previously have factoring regulations in place. Do you know how that has helped the market development, if at all?

Harm: At the moment, we’re in an education phase. The structure has started to form in certain countries that have taken on the model law, like Zimbabwe. There’s a thirst for it. As I left Zimbabwe [from an FCI conference in April], the FCI’s head of education stayed back for an extra day and met with [Zimbabwean bank] CBZ for an education event in which over 50 people from the bank came and listened to three hours on factoring. It covered legal, sales, credit, policy and liquidity – it was great. To me, in most African nations, we’re at a point of figuring out how it works, what needs to be in place, what regulations are required and building out credit and underwriting teams, for example.

 

GTR: Does factoring have any particular advantages over other forms of financing in Sub-Saharan Africa, in terms of closing the trade financing gap, particularly for SMEs? Does it face the same challenges in terms of awareness?

Harm: There are many forms of factoring, but at the end of the day, it’s about the invoice and the biggest advantage is being able to build working capital based on that asset. I was speaking with a local banker [in Zimbabwe] about this, and he made the comment that we don’t really need factoring, because most small businesses are owned by an individual who owns a house, and they can borrow against the house to fund their business. To me, that was a perfect example of where we need advocacy and education to say: you really should match your financing to the invoice. Why should a house – which is a 30-year asset – be used to fund a 30- or 60-day loan? That really doesn’t line up, it doesn’t make sense. It’s also putting a hard personal asset at risk, when you really don’t need to. So even though the law is there, we still need to educate both the corporates and the banks and the financial institutions as to why you should match the asset to financial need. We’ve got some work to do.

 

GTR: The FCI statistics show that the US comprises just 4% of global factoring volume of FCI members, which is a very small number for such a large economy – and compared to Europe. Why is that?

Harm: There are a few reasons. One is that the US states have public registries to track ownership of invoices, which is really valuable. Most countries don’t have that regulation and tracking. Because the US has that infrastructure, they do supply chain finance, they do open account financing, they do reverse payables finance. Where factoring is used in the US is more for service. Companies will want a bank to manage the working capital, process the payments, do the collection work and take the credit risks. So in the US, it’s much more of a service product than a financing product.