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European ABF and Factoring: Why France and Germany are the markets to watch

Asset-based finance (ABF) globally is experiencing unprecedented growth. According to global factoring association FCI, last year the industry recorded high single-digit growth rates, with total ABF lending standing at close to US$3 trillion. While the US is the most mature market, Europe is increasingly emerging as a dominant force, accounting for roughly two-thirds of total market volume equivalent to close to 15% EU GDP. The overall growth rate in Europe is being driven partly by the rapid adoption of factoring in the CEE region, as well as in Western European countries, but also by advances in technology. All this is positive for economic growth as underpinning this rise in ABF and factoring is their increasing adoption by growth businesses, partly seeking funds for expansion whether that is the launch of new products and services or moves into new markets.

 

CEE leads Western Europe in the factoring growth race

There is a general upward trend in uptake of factoring across Europe but Central and Eastern Europe (CEE) is seeing the largest increase. This is partly due to CEE banking markets being among the fastest growing and most dynamic in the world. One of the fasted growing areas is factoring, which is seeing double-digit increases as entrepreneurs and growth businesses across the region up their adoption of this financing technique and see it increasingly as a core funding tool.

This growth in factoring is partly driven by the buoyant economic expansion of the region, with the A8 countries (those that joined the EU in 2004) experiencing profoundly healthier growth compared to Western Europe. Indeed many emerging markets and SME and entrepreneurial sectors in CEE are booming and factoring is playing a key role in this growth. For example, in Poland, the largest ABF market in the region, factoring activity grew by 12 per cent in 2018, with over 15,000 businesses using this financing technique, while domestic factoring in Romania grew by 14 per cent, and in Hungary by an impressive 58 per cent.

Factoring activity in Western Europe, which is a larger market, has naturally experienced slower growth rates compared to CEE, but expansion is still robust. With more than 20 per cent of European market share, the UK is the largest factoring market in Europe with an annual volume of £300 billion, working with over 40,000 businesses, a large majority of which were SMEs. However, the UK’s domination in European factoring is being tested, with France and Germany the leading challengers.

French factoring market particularly dynamic

The factoring market in France, the world’s second largest, has been particularly dynamic, growing at a rate of more than 10% per year in recent years and worth over total of 300 billion euros in receivables sold. In France, SMEs, which contribute some 55 per cent to GDP, total around 3 million business, employing 9 million people. Operating largely across the ‘non-financial business economy’, such as retail and transport, as well as specialised skill industries, the productivity of French SMEs is almost one third higher than the EU average. Their embrace of ABF and factoring has been instrumental in the sector’s recent growth.  

German factoring sector in rude health

Germany has the largest economy in Europe, with GDP of around USD $3.5 trillion and contributing to almost 30 per cent of Eurozone economic activity. Supporting the economy are Germany’s 2.45 million SMEs, which contribute almost 55% to German GDP and employ 18.3 million people.Increasingly they are turning to ABF and factoring for their financing needs. Early last year, the turnover of the members of the German factoring association increased by 7.2% to a new total of 232.4 billion Euro. The number of clients increased at an even faster pace and was up by over 33%. Currently, more than 36,000 clients use factoring as an alternative method of financing.

For the first time, the factoring ratio, i.e. the ratio between the volume of purchased receivables (according to the turnover of the members of the German factoring association) and the gross domestic product (GDP), of 7.1% exceeded the seven-percent-threshold. The factoring turnover increased encouragingly by 7.2%, that’s growth for the eighth year in a row. “This proves that factoring is by now firmly established in the area of SME financing”, Joachim Secker, spokesman of the German factoring association´s executive board, commented recently.

Impact of tech a key driver  

As well as SMEs and growth business embracing ABF, another key driver of the sector’s growth in Europe, is the high level of innovation and the rapid pace of expansion in fintech solutions in this area.  In particular, ABF management software functionality and transaction streamlining has been transformed in recent years, with new capabilities developing year on year. Banks are also considering a range of platforms to automate and streamline data capture requirements and more efficiently deliver a seamless financing product to their business customers.

Platforms such as our own LendScape automates and streamlines data capture, offers real time risk management, and provides insights and analytics into reporting. Also, as blockchain gains traction to support the business and trade transaction flows, there is an opportunity to connect ABF into the process; yielding greater granularity and enhanced data quality – and hopefully giving banks more confidence to increase their ABF lending to the SMEs that are the lifeblood of most economies.

 

 

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