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KN65081 KEY NOTE FACTORING AND INVOICE DISCOUNTING OCTOBER 2001

Editor: Dominic Fenn
ISBN: 1-84168-259-4

This report covers: factoring, invoice discounting, funding, recourse factoring, non-recourse factoring, international factoring, international discounting, domestic factoring, average payment period, prepayments,bank lending, sources of finance,leasing, hire-purchase,

Companies covered include: market size, market value, leading companies, turnover, market share, statistics, marketing, trends, research, industry, business intelligence, sector, strategy, factoring, invoice discounting, funding, recourse factoring, non-recourse factoring, international factoring, international discounting, domestic factoring, average payment period, prepayments,bank lending, sources of finance,leasing, hire-purchase,Royal Bank of Scotland Commercial Services, Lloyds TSB Commercial Finance, GMAC Commercial Credit, HSBC Invoice Finance (UK), Barclays Bank Sales Financing, GE Capital Commercial Finance, NMB-Heller, Bank of Scotland Cashflow Finance, Euro Sales, Venture Finance,

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Executive Summary

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TABLE OF CONTENTS

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EXECUTIVE SUMMARY

This report looks at the factoring and invoice-discounting sector in the UK. The sector is still generally referred to as 'factoring' because that is how it began — a factor took over the running of the client's sales ledger and provided the client with immediate cash — but increasingly it is focusing on invoice discounting, where the lending institution advances cash but does not manage the sales ledger for the client.

Key Note's review of the industry comes at a most interesting time. While the research for this report was being carried out, Euro Sales announced rising bad debts, and the US-based General Electric Corporation, which already has an important position in the UK factoring/discounting market, announced that it wished to buy Heller Bank, the major shareholder of one of its competitors, NMB-Heller. As one industry insider emphasised to Key Note at the time:

"You can lose a lot of money in this industry, but people never think of that."

Key Note estimates that the total market for factoring and invoice discounting in the UK and the Republic of Ireland was worth £85.63bn in 2000. More than three-quarters of this figure was derived from invoice discounting, although the majority of the industry's clients make use of factoring services. Factoring clients tend to be smaller than discounting clients, and their borrowing needs are lower. Those that buy discounting tend to be larger in size, and they negotiate much larger financial packages. These packages increasingly include asset-based finance, where the lending is based on physical assets and not on debtor value.

The factoring and invoice-discounting market is enjoying strong growth: Key Note estimates that the market's value increased by 18 percent in 2000, in line with the growth in client turnover reported by the members of the Factors and Discounters Association (FDA). The market is being driven by the growth in the invoice-discounting sector and by the fact that the financial institutions are pursuing much larger clients than they were in the mid- to late 1990s.

However, factoring and invoice discounting still represent a fraction of externally sourced finance — at least among small and medium-sized enterprises (SMEs) — so the market has huge potential. This explains the growth in the number of suppliers in recent years. There are now around 50 providers of factoring and invoice discounting in the UK market. Two of these, GMAC Commercial Credit and GE Capital Commercial Finance, are relatively new US entrants, and both are making an impact on the market. The ten largest companies in the market accounted for almost 90 percent of total advances in 2000, so most of the suppliers have quite small positions in the market. However, with advances totalling around £7.6bn, there is plenty of business even for the small operators.

Key Note forecasts that the market will grow by between 15 percent and 18 percent each year between 2001 and 2006. Invoice discounting is likely to increase its dominance in the market.

Text © 2001 Key Note

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Last updated by Jacob van Eldik 20th January 2002