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The Mesopotamians were factoring in 1700 BC. But they didn’t have to contend with changing regulation, increased cybercrime, and geopolitical challenges – all which have made the recent period a particularly turbulent one for the industry. However, new technology and untapped markets in emerging economies provide exciting opportunities for growth.

Resilient but stagnant

Trade, factoring, and receivables have proven themselves resilient industries, growing by 3.1% in 2023 despite macroeconomic and political challenges that threw many other industries off course. Despite relatively slow growth, factoring is attractive to investors due to its countercyclical nature: in times of crisis, organisations want to secure their cash flow positions, and receivables are a safe way to do that. “We’re in an industry that actually grows when there is trouble happening around – organisations feel safer in moving into receivables finance during that time,” said Borgmeyer. 

However, there are signs of a slowdown: the German factoring market, which has seen years of constant growth and reached almost €400 billion in size, is forecasted to stop growing in 2024 for the first time ever. This might be a sign of a mature market, although Germany’s 9% factoring ratio sits well below its neighbours’ (21% in Belgium, 16% in France). Germany’s lacklustre GDP growth, the lowest in the EU at a forecasted 0.1% in 2024, could be another reason for the decline. 

This continues a pattern of modest growth in the factoring industry in the EU as a whole, with especially Western Europe experiencing low or negative growth in the last few years.  Developing economies might be the ticket to more impressive numbers: factoring companies are eyeing Africa, India, and the Middle East, whose small- and medium-sized enterprises (SMEs)  are in dire need of financing lifelines, as opportunities for expansion. 

Untapped emerging markets can benefit most from new technologies in the factoring and receivables sector, especially digital solutions that expand access to financing. These markets can be important drivers of growth when the European market is stagnant.

Digitisation for growth

The single biggest enabler of growth in the factoring and receivables business in the next few years will be digitisation, which will make producing the documents necessary for trade much easier and faster. Even though the underlying document is basically the same, moving from paper to digital trade documents will enable larger volumes of documents to be moved around the world at unprecedented speeds, representing the biggest change in the factoring industry since the shift from stone tablets to paper thousands of years ago. 

While the technology is there, and some countries have been proactive in passing legislation that promotes the use of digital trade documents, as the UK did with the Electronic Trade Documents Act (ETDA) in 2023, adoption has often been sluggish. As more countries adopt legal standards for electronic documents and more firms start using them, the factoring industry could see widespread growth and increased efficiency in the next few years.

Challenges ahead

While legislation can enable growth, like ETDA, there are fears it can also stifle it—as upcoming regulation on new technologies might. “AI regulation will most likely prevent the development of tools that are relevant and important to manage millions of receivables that are out there, to reduce risk and fraud,” said Borgmeyer. 

New regulation proposed by the EU intended to address the problem of late invoice payments would mandate payments within 30 days without any exceptions. If passed, this would significantly reduce the European market for trade and receivables financing. The EU has also been worrying the industry by imposing heavy tariffs on electric cars from China, sparking fears of a trade war that would further stifle the market; the upcoming US election and the Republican plan of increasing tariffs on many foreign goods have made the landscape even more uncertain. 

Some risks, on the other hand, are more theoretical than real for now, like cybercrime. Digital trade documents are seen as more vulnerable to cloning or manipulation than paper documents, leading many in the industry to cite cyber security as the biggest risk in the coming year. 

However, for now, this has not been a significant concern, said Borgmeyer. “Cybercrime is something that we have been registering, not because of attacks on our systems or on the systems of our clients, but rather because of the requirements that are being placed to us. It’s not that we’re seeing it happening, but we’re seeing that people are becoming more and more concerned.”

Cybercrime is bound to rise as the trade and factoring industry becomes more and more digital – but firms are prepared. A joint initiative by efcom and other tech firms in the industry being launched in 2025 will focus on fighting back against fraud and preventing cybersecurity risks to promote digital expansion without compromising security.

The factoring and receivables industry is looking strong despite regulatory, macroeconomic, and political challenges. New technologies and emerging economies are important opportunities for growth, especially as companies work together to mitigate the risks involved.  

The post PODCAST | Factoring and receivables: What’s in store for 2025? appeared first on Trade Finance Global.

Factoring is often under-appreciated. 

Yet, while it may not receive all the attention other trade finance products do, it is equally important. 

According to FCI’s report released on 21 May 2024, the world factoring industry demonstrated robust resilience and growth in 2023, with a notable 3.6% increase in volume compared to 2022, bringing the total to €3,791 billion. 

This follows two consecutive years of double-digit growth, marking a return to pre-pandemic stability. 

Over the past two decades, factoring has shown remarkable strength, with a compounded annual growth rate of 8.3%. 

This highlights its critical role in supporting SMEs and corporates by providing liquidity, protecting against customer bankruptcies, and offering global collection support. 

While Europe remains the largest contributor, accounting for approximately 68% of the global volume, emerging markets in regions like Asia-Pacific, the Americas, and Africa are showing significant growth, presenting vast opportunities for expansion.

Figure 1: Evolution of Global Factoring Volume (in Euro billions). Source: FCI 

To learn more about the factoring market, including important growth regions, and Islamic finance, Trade Finance Global (TFG) spoke with Federico Avellán Borgmeyer, Chief Partner Officer at efcom, Abdelrahman Elbeltagy, Islamic Factoring specialist at efcom, and Vikram Nair, CEO of Xilligence.

Factoring’s countercyclical importance for trade finance

Factoring involves selling receivables at a discount to a third party, providing immediate cash flow to businesses. 

This financial tool is essential for many small and medium enterprises (SMEs) that might otherwise struggle to secure traditional bank loans. 

Factoring also tends to grow counter-cyclically. 

Avellán Borgmeyer said, “Factoring or residual finance has always grown well when the markets are uncertain, and we have a lot of this right now.” 

During economic downturns, businesses often face extended payment terms from their buyers, increasing the need for immediate cash flow solutions. 

Factoring ensures companies can continue to operate smoothly even when the broader economic environment is unstable, making it indispensable for SMEs in emerging economies.

Strategic focus on emerging markets, and the value of partnership

While Europe remains a dominant player in the global factoring market, contributing to approximately 70% of the total volume, the focus is gradually shifting towards emerging markets. 

German-based company efcom, operating in emerging markets worldwide, is uniquely positioned to observe these changes. 

Importantly, implementing factoring strategies into new markets like India or MENA requires engaging with partners.

Vikram Nair, CEO of Exilligence, said, “The reason why we partnered with efcom was because [they are] a clear industry leader in the factoring space with their software and solutions. Given our presence and experience in India and in the Middle East, GCC countries, we thought that there would be a seamless fit.”

Avellán Borgmeyer added, “When we look into markets like the Indian market, for instance, a huge and dynamic market, we don’t say that efcom is going to do it alone, we look for partners like Xilligence, and we try to grow the market together.” 

This strategic pivot, using partners to help enter emerging markets, is driven by the maturity of European markets, where factoring penetration has reached significant levels. 

For instance, Germany has achieved a factoring volume of 10% of its GDP. In contrast, many emerging markets still exhibit low penetration rates, presenting vast growth opportunities.

Avellán Borgmeyer said, “If you take any country outside Europe, like India, African nations, or the Gulf region, they all move in a very low single-digit range. We believe that within the next 10 years, all these economies will see a steep rise in development.” 

Currently, the African continent only accounts for 1.2% of global volume, and the Middle East accounts for just 0.3% of the market. 

The attraction to these regions is not just about untapped potential; it is also about the intrinsic characteristics of factoring that align well with the needs of emerging markets. 

Factoring provides immediate working capital, crucial for businesses in developing economies where access to traditional finance is often limited. 

Moreover, the emphasis on risk-sharing and the ethical considerations embedded in certain types of factoring, such as Islamic factoring, resonates well with these regions’ cultural and economic contexts.

The online platform, efcom’s efOnline, enhances the interaction between factors and clients. 

This web-based application provides a real-time dashboard, live data reports, and comprehensive debtor and invoice overviews. 

Clients can request limits, report direct payments, and manage outpayments autonomously, reducing the workload on factoring staff and increasing operational efficiency.

Adoption and development of Islamic factoring

Islamic finance, governed by Sharia law, prohibits the charging of interest and emphasises risk-sharing, asset-backed transactions, and ethical investments. 

These principles form the foundation of Islamic factoring, a niche yet rapidly growing segment within the broader trade finance industry. 

efcom’s product, ifX, exemplifies these principles by offering a Shariah-compliant factoring solution. 

ifX covers the Wakalah Bi-Al Istithmar contract and is designed for seamless integration through numerous standard APIs. 

The product’s cloud-based nature ensures accessibility from anywhere, enhancing its appeal to financial institutions in the MEA and APAC regions.

Elbeltagy said, “If you look at Islamic finance, you find that it’s a more ethical way of financing that aims for more productive financial activities as it focuses on real economic activities that cause economic growth.” 

Given its asset-backed nature, factoring is particularly well suited for adaptation to comply with Sharia law. 

This adaptation involves structuring transactions to ensure they do not involve interest and adhere to risk-sharing and asset-backing requirements. 

The potential for Islamic factoring is significant, given the economic growth and increasing sophistication of financial markets in the Gulf Cooperation Council (GCC) and other Muslim-majority regions like the Middle East and North Africa (MENA) region.

Avellán Borgmeyer said, “Today, most of the finance done in Islamic countries is still in the Western style, but there is a growing tendency towards Islamic finance. In that respect, there is a big opportunity to provide a product that is appealing to the region.” 

Implementing Islamic factoring involves adapting existing technologies and workflows to meet Sharia requirements. 

This process includes developing new software solutions or modifying existing ones to accommodate the unique aspects of Islamic finance. 

The goal is to create flexible, scalable, and compliant products tailored to the specific needs of different clients and markets.

By offering Sharia-compliant options, financial institutions tap into a growing market and contribute to the overall development and stability of the financial system in these regions. 

The increasing recognition of factoring’s importance in trade finance, the strategic focus on emerging markets, and the development of Islamic factoring all point to a dynamic and evolving landscape. 

As businesses worldwide navigate economic uncertainties, factoring will play an increasingly vital role in ensuring financial stability and fostering international trade.

The post VIDEO | efcom: Turbocharging the growth of factoring and supply chain finance in MENA and India appeared first on Trade Finance Global.