During 2014, more than $3,000 billion dollars changed hands between businesses and companies who provide factoring. A 2019 study recently published by Reports Monitor (RM) determined that by 2026, more than $4,600 billion will be handled in this manner.
The data in this study shows other information which is fascinating when you consider the past and future potential for factoring including the geographical areas where businesses use factoring. In fact, there are very few businesses that take advantage of this unique type of financing. Geographically, the following percentage of businesses use factoring:
- North America 2.1 percent
- Europe 5.3 percent
- Asia Pacific 5.4 percent
- Latin America 4.5 percent
- Middle East and Africa: 3.3 percent
Overall, this is a relatively small percentage of the businesses who could benefit from this type of financing.
Use of and Reasoning For Factoring
This study also shows that nearly 79 percent of all factoring is done by small and medium-sized businesses. Despite the small percentages of businesses who rely on factoring, over the years, the largest growth rate use of factoring is within small and medium-sized businesses. These business owners often face the biggest challenge in getting more traditional financing and often have the most struggles with cash flow.
This study goes on to talk about why factoring is so beneficial to these business entities in specific and have a significant impact on company growth. Some of these reasons include:
- Not taking on debt — one of the challenges many business owners face is having well-established banking relationships. Even when they have excellent banking relationships however, they often do not have the balance sheets which will allow them to have a loan approved quickly.
- Need for immediate cash flow — when cash flow is drying up, business owners still must pay their employees, need cash on hand for bidding on contracts and acquiring materials, and have monthly obligations to pay. While a traditional loan can take weeks, or months to get approved, factoring offers near-immediate cash flow to the business.
- Costs of doing business — while there are costs associated with factoring, one way a company saves money with factoring is the elimination of the need to collect payment on invoices. Because factoring companies are buying your invoices, they also take responsibility for the collection of those invoices.
A Glimpse into the Global Factoring Market
More than 65 percent of the global factoring market is in Europe. These markets skyrocketed during the recession and are now showing signs of slowing. In the United States, factoring declined seriously through 2018, a result of fraudulent activities which many were slow to react to. Asia and other emerging markets will likely continue to see an increase in the use of factoring as more business owners get engaged in growth in these markets. What is particularly fascinating is the number of companies that offer factoring services in various regions. Keep in mind, in many global markets, factoring is dominated by big banks. Here’s how the number of factors looks globally:
- Europe 646
- Asia-Pacific 5,133
- North America 764
- Middle East and Africa 59
- Latin America 744
With tighter banking regulations, better security, and blockchain technology, the growth potential exists in the factoring market.
How the Current Markets May Impact Factoring
Business owners who have been shut down during the COVID19 pandemic are only beginning the reopening process. Many of them are facing unprecedented challenges including operating at a smaller capacity. Because there is every reason to believe this pandemic will put downward pressure on demand, more business owners will be searching for creative ways to keep their doors open and continue to grow. Factoring may provide that opportunity.
Currently, none of us has a magic ball which will tell us how business owners will survive the current downturn in consumer demand. We also cannot determine what will happen to lending restrictions once demand picks up. What we do know is that business owners will all have overhead costs to pay including salaries, taxes, and will need to purchase materials for their business.
Factoring growth in the United States has been much slower than other corners of the globe but during the upcoming period where businesses may face unprecedented challenges, this could provide an opportunity for factoring in the United States to exceed growth expectations.