Go East, Invoice-Financing Firms
Invoice financing may have made its world debut in the 1950s, but it took over three decades for it to make a real impact on the global lending market. Initially introduced in the US, invoice financing enjoyed widespread adoption in the west throughout the 1980s and during the recessions of the early 1990s. This growth continued steadily through the beginning of the next decade and, by 2003, the annual worldwide volume of factoring reached nearly US$1 trillion, according to a World Bank report.
But US and European companies offering invoice-financing services – from recourse factoring and confidential invoice discounting to asset-based lending – have recently discovered few growth opportunities for their traditional products at home. The saturation of domestic markets has left them with two expansion alternatives: developing new products for their current markets, or tapping new markets that maintain high growth potential.
While invoice-financing firms continue to leverage new technologies in order to develop innovative offerings for their existing client base, the estimated growth potential for factoring products in emerging markets is staggering in comparison. According to the same World Bank report, Taiwan, India and several eastern European countries exhibited annual growth rates of several hundred per cent between 1998-2003, while factoring in China grew an astounding 23,900% during that five-year period. Given the expected rapid growth of the economies of these countries as they further adopt western business skills and practices, factoring companies have a golden opportunity to increase revenues by tapping such markets.
First introduced in the early 1950s in the US and at the end of that same decade in the UK, invoice financing initially underwent an extremely slow adoption process in the West. Best suited for young small and medium enterprises (SMEs), invoice financing acquired the reputation of being a ‘last-resort’ financing alternative. This was due to both its high cost and the lack of confidentiality of recourse factoring – the original invoice financing product to enter the market.
But with the expansive nature of the North American and European economies during the
1980s followed by the recessions of the early 1990s, invoice financing proved to become a viable lending option and product of choice for SMEs. Starting with basic recourse factoring services, factoring businesses – which at the time were primarily small companies with domestic clients – began to solidify their position in the lending market. Market demand for non-recourse and confidential invoice-discounting services grew, and were eventually added to the factors’ portfolio, thereby further boosting their standing.
Having finally shaken its ‘last-resort’ stigma, invoice financing enjoyed widespread adoption in the West throughout the 1980s and early 1990s. During the recessions of the
1990s, factors began to attract the interest of other lending entities, particularly commercial banks, which were already providing secured and unsecured lending to SMEs. Given that the banks’ access to information on SMEs was limited, they recognized that they could gain insight into small enterprises by gathering data on them via factors, thereby enabling better risk management and fewer bad debts. As a result, major banks in both Europe and the US acquired factoring companies, and added invoice financing to their ever-growing product portfolio.
By the early 2000s, however, domestic factoring activity plateaued in western markets. For example, after reaching a record-high US$102bn volume in 2000, the US factoring market dropped to US$80bn at the end of 2003, according to the World Bank. And in the UK, the world’s leading factoring market with an annual volume of over US$160bn, activity grew by only 2.5% between 2002 and 2003.
Given the saturation of domestic markets, factors are being challenged to boost their business in two very different ways: by adding new products to traditional markets, or by moving into new developing markets.
New technologies have enabled factors to add innovative products to their portfolio and, in turn, slightly raise their activity in traditional markets. For example, increased automation has lowered the risk and operating costs of confidential invoice discounting that, in turn, has driven the growth of this product in the West in recent years. Factors have also expanded their business by introducing new products such as reverse factoring and bundling complementary services such as asset-based lending in order to meet the ever-evolving needs of their domestic clients.
But penetrating emerging markets appears to be a more compelling alternative. Between
1998 and 2003, several eastern European countries recorded huge increases in factoring activity, according to the World Bank. The Czech Republic and Poland both enjoyed over
300% growth, Hungary experienced 900% growth, and the Baltic states of Estonia, Latvia and Lithuania recorded over 950% growth during those five years.
And in Asia, the potential seems to be even greater. India’s factoring activity grew by over
800% between 1998 and 2003, while Taiwan recorded 1,500% growth during the period on extremely high US$16bn volume. And with many western eyes focused on China, it is hard to ignore its 23,900% increase in factoring activity during those five years.
There are three main reasons for the upsurge in factoring activity in emerging markets:
Given that Western markets are saturated with invoice financing, factors can look towards
eastern Europe and Asia to significantly boost their business. These emerging markets, which are either booming or on the verge of an economic explosion, represent a natural source for expansion, particularly over the next five years.
While factors do not need to revamp their current products to penetrate this new territory, they must understand the unique aspects of each market, such as language and business habits, in order to succeed. As a result, factors should consider partnering with a domestic enterprise or acquiring a local entity to facilitate the transition. If undertaken wisely, such a move can be expected to pay great dividends.