Factoring in Germany - World Factoring Yearbook

After years of continuous growth, in 2009 the German factoring industry suffered its first decline in factoring turnover since the German Factoring Association, Deutscher Factoring-Verband (DFV) began to keep records. The total turnover of the 25 (in 2009: 26) factoring companies in the Association declined by €7.6 billion to €96.21 billion, as reported by the DFV.

In comparison with 2008, this represents a decrease of 7.34% in turnover. Nevertheless, according to FCI statistics, the German factoring market still ranks fifth worldwide and in Europe is only behind the UK, France, Italy and Spain in terms of turnover.

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.

But that does not mean Germany has yet overcome the recession. The major economic institutes expect unemployment to rise in 2010 because even if the economy grows at a predicted 2.5% rate, its output will still be below pre-crisis levels. Many companies will therefore still have surplus capacity and may lay off employees. As a result of potentially rising unemployment and the ending of government support for companies’ short-time work programmes, private consumer spending is unlikely to boost growth, which is mostly dependent on the development of exports.

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.

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.

Currently 25 factoring companies are members of the German Factoring Association (DFV) representing more than 90% of the market. The DFV registered two new entrants and two departures last year: Siemens Financial Services and Procedo Factoring left the DFV, the new members are ForFact Exportfactoring and ZAAG (specialized in the factoring of dentists and dental laboratories). Adi GmbH joined the DFV at the beginning of this year.

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 recent sale of RBS Factoring GmbH (one of the top ten) by Royal Bank of Scotland to GE Capital (former Heller Bank), announced at the end of March, has started an expected consolidation process in the market.

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.

In 2009, Germany not only suffered a record economic downturn, but also lost its title as world leader in export trade to China. Regarding international factoring, the negative development in international trade resulted in the first ever noticed decline of total turnover, from €30.15 billion in 2008 to €25.84 billion in 2009 – a decrease of 14.32%. The drop in turnover in the export trade business amounted to 13.56% compared to 2008 (€27.66 billion in 2008 as against €23.91 billion in 2009). In import trade business, the decline in turnover of €0.57 billion to €1.92 billion in 2009 (compared to €2.49 billion in 2008) indicated a slump of 22.75%.

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.

According to the DFV, the balance between the different forms of factoring (based on turnover figures) hardly changed in 2009: in-house factoring continues to dominate the market with 78% over standard (full service) factoring (19%) and maturity factoring (slightly over 2%). The other niche factoring forms, such as reverse factoring (part of supply chain finance), still have an insignificant market share but are gradually growing in importance.

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 2010. Despite this positive prognosis, 2010 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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