The future of Factoring – Finance magazine, Nov. / Dec. 2020
Although the factoring market in Germany has developed at a steady and above-average growth rate over the past 20 years, it still has considerable development potential compared to the most important European markets. The factoring quota in Germany reached eight percent of the gross domestic product last year, but the European average is 13 to 14 percent.
For companies, factoring offers an alternative form of financing, not only as a secure source of liquidity, but above all it helps to reduce risks and to optimize the balance sheet. If the seller of the receivables has a good credit rating, there are very simple operational solutions, implementation can take place in a few weeks, and the prices are attractive compared to those of other financing options.
Challenges in Factoring
There are current challenges in the factoring market that have to be mastered too, such as an uncertain economic development and the suspension, until the end of the year, of the obligation to file for insolvency. Quite a few people assume that Germany will face a wave of bankruptcies in the following year. On the one hand, there is the federal government's protective shield for trade credit insurance, which expires at the end of the year, to the amount of 30 billion euros. It is uncertain whether this will be extended. On the other hand, one has to consider the risks which are entailed in financing and securing the supply chain. They are difficult to assess and can have far-reaching consequences for the factoring market.
Despite this uncertain market environment, there are some trends that will change the factoring market. There remains the constant trend towards digitization and automation in the market. The factoring divisions of some banks do not wish to leave the field open to Fintechs and other modern platform providers. Consequently, they are investing heavily in their own platforms. The focus is on a diversified product mix and on internationalization. The issue of sustainability does not stop at the factoring industry. For example, PB Factoring has developed the so-called ESG-linked factoring as a product and is in the process of carrying out the first transactions with it. Companies that want to use this sustainable alternative financing instrument not only have to define the use of the funds resulting from the factoring, they must also have clearly measurable goals in the area of sustainability.
Some possible goals could include: Reduction of CO2 emissions, or reduction of water consumption, or the use of electricity from sustainable sources. These goals must be included in external reporting – for example in the annual financial statements or in a separate sustainability report. These goals are compared with the taxonomy of the bank's own factoring company. Together with the factoring recipient, corridors or threshold values are defined for the achievement of the objectives and what consequences the fulfillment or non-fulfillment of the objectives will have for the terms and conditions of the factoring program.
Dinko Mehmedagic is the managing director of PB Factoring GmbH, a 100 percent subsidiary of Deutsche Bank, in Bonn.