Factoring is a type financial service offered by the banks or the third-party financial service provider in which a seller trades its accounts receivables the factor at a discount rate in order to raise the funds. The seller gets immediate funds for the receivable and the factor holds the invoice and makes a small profit. It consists of three stakeholders namely seller, buyer and factor. The seller sells the goods to the buyer, raise the invoices and submit the invoices to the factor in order to raise funds whereas the factor verifies the invoices. The factor pays the 80% of the fund to the seller and remaining 20% fund after the buyer make payment to the factor whereas the interest charged pay at the same time or may be in arrears depends on type of agreement. The cost of factoring is measured by the financing volume and the credit quality of invoices. Typically, the commission fees range from 1.15% to 3.5% per month
Rising Adoption Rate of Fintech Solution among SMEs is driving the market growth
Growing awareness pertaining to the advancement of financial technology, such as money transfer and payments, budgeting and financial planning, borrowing, saving and investment, and insurance, drives the adoption of Fintech. For instance, the adoption rate of Fintech globally has seen a continuous upward trend, such as, in 2019, the adoption rate of china and India is 87%, whereas for Australia, Canada, Hong Kong, Singapore, the U.K. and the U.S. is 58%, 50%, 67%, 67%, 71%, and 46%, respectively. Most of the payment service providers entrench confidence among small business owners to take their steps in the market. For instance, International Fintech, a licensed e-money institution and payment service provider, offers Fintech solutions for the small business owner, offering automated solutions for bulk payments and related services in the financial sector. As most of the banks are reluctant to provide many pay checks, an automated solution offered by Fintech solution providers comes into play. Fintech offers bulk payment services at reasonable rates. This allows SMEs to approach fintech companies, increasing the return on investments (RoI) of the factors, such as banks or third party insurers.
The Fintech companies’ offers significant legitimacy and safety solution, which monitors the SMEs transaction process. This engenders a win-win situation for the large banks and SMEs to thrive in the factoring industry. FundBox, a U.S.- based company, offers fintech solutions to SMEs. Fundbox allows SMEs to incorporate their accounting software or business bank account to its Fundbox application. This integration renders Fundbox with precise information regarding the business performance, enabling data-driven decision making concerning continuation or termination of the business relationship with the SMEs. If the data fulfils the parameters of the solution, the funds or the loans are made available for the business process. Thereafter, the company schedules the payment process with the help of the Fundbox application, which can be paid back in due course of time. Such kinds of transactions are carried out in a secure manner, recorded in the company’s history to keep track of payments, fees, and amounts dues or earned. Fintech solution, on the other hand, allows SMEs to operate the business and negotiate at short margins.
Blockchain in Invoice factoring is anticipated to offer lucrative growth opportunities
Advent of information technology has revolutionized the financial sector significantly. Innovative solution in financial sector has automated the transaction process in the factoring industry. Also, adoption of automated solution has not only increased the financial sector but also enhanced the security and planning solution. The implementation of crypto-solution has improved the accurate transactions and secured the critical information of both the parties (i.e Supplier and buyers of factoring process), thus preventing from the financial frauds. According to Unicsoft, one of the solution providers of blockchain has identified the some of the application areas where most of the companies are implementing the blockchain in factoring process. Additionally, the secured and speedy workflow process has one of the crucial aspects for the factory processes. Therefore, the integration of blockchain enhances the financial transaction through centralized and encrypted approach by integrating smart contracts in the factoring industry. Ethereum, NEO, Hyperledger, and R3CORDA are some of the open blockchain platform. Out of these, the Ethereum is most preferred platform. The platform enables the decentralized storing and execution of a smart contract by which the hashing process is conducted locally. The processed data further turn out to be public that helps in improving the network security
Domestic factoring is anticipated to dominate the market during the forecast period
Domestic factoring holds the major share when compared to international factoring, owing to the lack of geographic reach and legal impediments of international factoring. The domestic demand for factoring is considerably increasing in emerging markets attributed to the burgeoning SMEs in the developing countries. These enterprises play a crucial role in upturning the country’s GDP growth. However, this type of business runs out of financial support, which is a major hindrance for them and due to which many SMEs are shutting down their businesses. Below figure depicts the total turnover of international and domestic factoring. International factoring is also known as cross border or export factoring. Export factoring permits trade to be carried out on open account terms and assists, especially if there are short-term sales of products and where there may be a risk of non-payment. It inhibits the credit and collection troubles in the case of international sales and accelerates cash flows, thereby assisting in credit risk mitigation and provides liquidity in the business. It paves a way to provide easy finance to the exporters. Export factoring helps exporters to upturn the sales volume by offering open account terms to the importers, enabling the importers to place large orders. Moreover, factoring companies also ensure the payment from the importers, and in case if the importer defaults on a payment due to bankruptcy, the exporters hold no responsibility for the default. This provision significantly attracts exporters to international factoring. Exporters are also adopting international factoring considerably as they have realized that it can help them to become more competitive in complex world market conditions.
SMEs to grow at a significant CAGR during the forecast period
Factoring plays a critical role in the financial requirements of small and medium-sized businesses. SMEs operating in unfamiliar sectors often face challenges in accessing affordable finance. This adversely effects on the enterprises located in emerging economies. Therefore, SMEs are extensively adopting the factoring services, further augmenting the market growth. Factoring is intended as a means to ease SMEs’ access to trade finance and promote their inclusion in value chains. It also differs from traditional bank lending, as well as asset-based lending, as it does not generate debt on the firm’s balance sheet, and there are no unsettled loans. This helps SMEs to generate the capital without any burden. Developing an alternative for financials is of vital importance for SMEs that still confront difficulties in accessing bank finance. Some entrepreneurs lack financial knowledge, strategic vision, and the resources to attract alternative finance instruments, and thereby they lack potential investors. Hence, factoring helps them to take the business forward, and this boosts the adoption rate of factoring by SMEs. Moreover, factoring also helps SMEs by connecting it with large enterprises through trade finance and supply chain finance. Hence, the factoring industry has great potential to promote SME internationalization in support of intraregional trade and financial inclusion in the region.
Europe dominates the global factoring market, with 66% of the total market share. Nowadays, factoring is considered as a secured short-term financing product committed to the development of economy and employment in Europe. Europe’s factoring market growth is primarily attributed to the presence of the key players, including Deutsche Factoring Bank, the Eurobank Group, HSBC Holdings, and many others. Moreover, favourable government laws also contributed to the growth of the market in the European region. In 2019, elections held in Europe and EUF leveraged this opportunity to raise awareness about factoring and to promote its benefits for the country.
Key players in the global factoring market include Deutsche Factoring Bank, Eurobank Ergasias SA, HSBC Group, BNP Paribas, Mizuho Financial Group, Inc., ICICI Bank Limited, and Axis Bank among others
Factoring Market: Segmentation
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