Factoring facts

The Factoring industry has been established in the UK for more than 35 years although it is fair to say that its reputation was tarnished in the mid 1980’s recession due to a combination of over enthusiasm to expand on the part of the factoring companies together with their clients clutching at straws in an attempt to prop up a lost cause.

This lead to factoring becoming known as a lending of last resort and it was said that notification of the involvement of a factoring company was the last gasp of a dying business. The high level of bad debts suffered by the factoring companies exacerbated this reputation.

In some quarters the stigma remains. In practice the prejudice is more imagined than real and there is absolutely no reason why the industry should any longer carry such a blemish.

Indeed the more stringent credit procedures and monitoring introduced by the industry meant that factoring companies out-performed the clearing banks in the subsequent two recessions.

The recognised industry body in the UK is the Factors and Discounters Association (The FDA) which was formed in 1997. Its aims include educating the business community to the modern view of factoring, including the more dynamic and enterprising funding solutions that factoring, discounting and stock finance are now providing.

There are currently more than 18,000 businesses in the UK using factoring and a further 8,500 or so using invoice discounting. These numbers continue to grow at a rapid rate and these figures represent growth of more than threefold over the past 15 years or so. During the same period lending by way of bank overdraft to small businesses has fallen by more than 40%.

As might be expected, the larger factoring companies – invariably subsidiaries of the major clearing banks – dominate the market in terms of market share.

Of the 26,000 or so companies using factoring over 76% use the top eight companies whilst the remaining 24% use the other 40 plus companies. The market leader has has around 20% of the total numbers in the factoring and invoice discounting market but constantly finds itself under threat for market share from its smaller and often more aggressive rivals.

Although smaller businesses form the majority in terms of the number of businesses using factoring (some 49% of businesses have a turnover below £500,000) some very large companies also use both factoring and invoice discounting.

The FDA statistics show that at the end of 1999 there were 808 businesses with a turnover in excess of £10 million are clients of factoring companies and in some cases these are companies with a turnover more than £100 million.
Even the Bank of England has become a supporter of factoring, advocating the use of factoring and discounting as part of its emphasis on the advantage of structuring the lending to its purpose.

The old cliché suggests that a banker is someone who offers to lend you an umbrella when it stops raining. Not so a Factor who is typically more entrepreneurial and flexible and who is probably not aware of the phrase “I am sorry, I cannot increase your overdraft, you are overtrading”!