At the annual meeting of the International Factors Group (IFG) in Malta this week, GTR sat down with secretary general Erik Timmermans to discuss the progress of the factoring, invoice financing and asset-based lending market in 2014.
GTR: What’s influencing the factoring market in 2014? What trends are you currently seeing?
Timmermans: Receivables finance, invoice finance and factoring continues to grow all over the world, and with good reason. Because it’s asset-based and secured, receivables finance offers good open account solutions, particularly to SMEs, which is very important, while at the same time being a low loss option for financial institutions (FIs).
At the moment, you have two forces at play. FIs are pushing for more debt secured products, possibly for reasons of capital requirement, while at the same time policy makers, particularly in emerging markets, are getting more and more interested in these products because they can help grow their economies.
GTR: Are the products themselves changing?
Timmermans: More and more factoring is being done with recourse than with non-recourse, compared with a few years ago. We’re also seeing the market evolving in two directions: the market in the US and Europe is evolving towards asset-based lending, with the financing not just of receivables but of things like inventory and intellectual property as well.
On the other side, we see a trend towards what one might call trade finance products: reverse factoring, supply chain finance (SCF), and even BPO, which isn’t a part of factoring but is nonetheless becoming a part of open account trade finance.
GTR: What is currently being done to develop the uniform rules for factoring? How long will it take for the industry to adopt them?
Timmermans: It’s important for the industry to have a harmonised legal environment: it makes it easier to roll things out. We are working increasingly with our friends at Factors Chain International (FCI) to develop the uniform rules, together with the International Chamber of Commerce (ICC).
The rules for correspondent (international) factoring are already in place. They were developed in 2000/01 and now, with the additional help of the ICC, the idea is to make these rules universally acceptable. The rules will be re-written on the basis of the procedures of the ICC, but the foundations exist already. We believe this process will be completed by the end of 2015.
Aside from that, the industry is also looking to develop a draft model law for factoring, which has less to do with the technicalities of correspondent factoring and more to do with the legal environment for factoring all over the world. There are huge differences between countries, even within Europe, and that’s something we aim to harmonise going forward.
GTR: How can factoring help to boost trade, and is it the best choice for the trade finance industry?
Timmermans: It depends on the situation, of course. It depends on the buyer and the seller. I’ve not said that factoring is by all means the best option for financing trade, but it may make things easier, particularly for SMEs.
In a classical factoring situation, you’re only dealing with a seller and the buyer is passive. The seller might be exporting to many different countries and buyers, but you don’t need their approval for financing receivables from them. They have agreed to buy something from a supplier for which there’s a receivable and an invoice which will be assigned to a factoring company which will then finance it. That’s the difference that could make trade easier and faster.
But a seller can’t just look at factoring like another banking product. There are different potential risks, challenges, disputes and issues involved and you have to understand the industry very well. That’s why IFG invests in education.
GTR: Which areas of the world are in most need of factoring?
Timmermans: Without doubt, the area most in need and the most challenging and, in many ways the most promising, is Africa. There’s a lot of interest there. The whole continent is slowly opening up to open account lending, but it will take time. You need the legal environment, for which you need to educate people and provide them with information, and you need the internal adoption of legal requirements around secured lending.
Latin America is growing, as is Asia, and there’s still a lot to do in many countries.
GTR: Trade finance is becoming increasingly concerned with securing physical supply chains. Will this provide many opportunities for factoring in the years ahead?
Timmermans: The factoring industry is, in the first instance, more of a domestically-based industry. 80% of factoring happens within a state’s borders, so typically it helps finance SMEs in their own backyard. What we as an industry must do is establish a common framework and educate businesses to get them to begin factoring domestically because that’s where it starts.