Opportunity out of crisis

In 2008 the turnover generated by the German factoring industry exceeded 100 billion euros for the first time. The total turnover of the 26 institutes represented by the German Factoring Association increased by almost 25% against 2007 from 83.5 billion euros to 103.84 billion euros. The factoring quota (the ratio of purchased volume of receivables to gross domestic product) increased from 0.13% to 3.58%. Such figures prove the point that factoring has succeeded in establishing itself as a mainstream financial instrument in Germany, particularly when one considers the penetration of the product into the country’s medium sized businesses. Despite the rapidly expanding financial crisis, the industry was able to continue its growth dynamic within this sector of the economy in 2008. The lack of liquidity in the market led a number of the top 30 companies listed on the German stock exchange (DAX) and other large corporates to consider factoring as a possible financing resource as they reflected upon their financial strategies in the downturn. The approach of these businesses has been of considerable benefit to the industry during these troubled times.

Nevertheless, Germany’s export business has been particularly affected by the current economic crisis, a situation that has impacted upon those German factors that operate internationally. The beginning of 2009 heralded a marked drop in international business – quite apart from general changes in the refinancing market – with factoring volumes dropping considerably, in line with falling German export business.

The financial crisis, which has also reached the industrial economy, has meant a significant increase in business insolvencies. This has led to increasing risks for factoring business. Factors in Germany, as in other countries, have been obliged to scrutinize their prospects and client portfolios even more carefully. As a result, the conversion rate of new contracts has decreased. And in addition the risk adjusted, much more restrictive, business policies of credit insurers are limiting the business opportunities of those factoring companies that offer debtor risk coverage through credit insurers. This is particularly affecting German factoring business, in which receivables are generally purchased without recourse.

On the other hand, the financial crisis has generated new opportunities for the factoring industry. With financing closely related to underlying business, factors have been able to directly judge the risks of the factoring client and their debtors, offering funding where other financial institutions cannot. This ability to extend funding whilst taking into account the threat of risk has been invaluable during these troubled times.

Under present conditions one question is particularly pressing for the finance departments of large and medium-sized companies – from where do we get fresh liquidity? Prospects are still focusing on the classic full service factoring and invoice discounting - both well-established products within the financial industry - but innovative factoring solutions are also becoming more popular.

Factoring clients usually focus on tailored solutions based on the specific services that factors offer: funding up to a certain amount and for a specific period of time, debtor risk protection, outsourcing of accounts receivables management and other additional add-on services.

According to its market share, invoice discounting (disclosed or undisclosed) remains the dominant factoring product in Germany. And despite the financial crisis, invoice discounting has not lost its market dominance, even with the product requiring a good level of solvency on the part of the client.

Full service factoring meanwhile, is the second most popular service in Germany. As a result of the financial crisis demand for full service factoring has increased, both domestically and for export business.

Finally, maturity factoring is the third most popular factoring alternative, but it continues to be considered a niche product in the German market.

Innovative factoring solutions such as reverse factoring used in supply chain finance, have also benefited from the financial crisis as suppliers and debtors have been forced to once again focus upon the optimisation of their working capital ratios. Large buyers are also interested in supporting and enforcing relationships with strategically important suppliers as the numbers of insolvencies amongst smaller suppliers have increased.

Larger companies have also expressed increasing interest in factoring products that will replace existing Asset Backed Securities (ABS) facilities. In comparison to the classic ABS programmes where receivable portfolios are structured within Special Purpose Vehicles and placed on the capital market, receivables are purchased by the factor and transferred onto the factor's balance sheet. Factoring is therefore much more flexible and the upfront costs are lower than in classic ABS programmes, whilst as a result of the credit crisis the launch of new ABS programmes for the securitization of receivable portfolios has become increasingly difficult. Such a situation has made the factoring alternative all the more attractive.

Many companies have been obliged to examine again the possibilities of internal financing, with the optimisation of working capital playing an increasingly vital role in financing a way through the downturn. Within this crisis context, factoring – with the numerous advantages it brings to its clients – has presented itself as an ideal financing tool.

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