Factoring (also called invoice factoring, receivables finance or receivable purchase) has evolved from a niche working-capital tool into a mainstream financing option used by SMEs and large corporates alike. This article reviews the industry’s growth, core definitions, legal foundations, risk realities, and how technology is reshaping factoring operations.
Factoring is a growing industry
FCI’s latest 2024 global statistics show factoring turnover reached €3,894.6bn, up from €3,791.5bn in 2023, which is an annual increase of 2.7%. Europe remains the industry’s centre of gravity, contributing €2,600.3bn (about 66.8% of global volume), while Asia-Pacific is the next largest region at €964.4bn (about 24.8%).
At the country level, China leads the world in 2024 with €679.0bn, followed by France (€431.4bn) and Germany (€398.0bn). Most factoring is still done within national borders – €3,227.3bn (82.9%) domestic versus €667.3bn (17.1%) international.
Factoring’s growth potential remains strong because MSMEs continue to face a large financing shortfall. The latest IFC-World Bank estimate puts the MSME finance gap at about US$5.7 trillion across 119 emerging markets and developing economies, rising US$8 trillion when informal enterprises are included. Because many MSMEs have significant cash tied up in working capital – including trade receivables – receivables-based solutions such as factoring and receivables finance remain an important source of untapped funding potential.
What is factoring?
Factoring is often marketed under different names (invoice financing, receivables finance, receivables purchase, debtor finance, invoice discounting). The cleanest way to avoid terminology confusion is to focus on the structure:
Under the UNIDROIT Convention on International Factoring, a factoring contract involves a supplier assigning receivables to a factor, and the factor performs at least two of the these functions:
- Finance for the supplier, including loans and advance payment
- Maintenance of accounts (ledgering) relating to the receivables
- Collection of receivables;
- Protection against default in payment by debtors
In real markets, some ‘invoice finance’ solutions are structured as secured lending against receivables rather than a receivables purchase/assignment. They may involve similar cash-flow issues, but they can differ in legal mechanics, control expectations, and accounting outcomes.
Certified Factoring Professional (CFaP)
Factoring law | When you need a new statute – and when you don’t
Many jurisdictions, especially the emerging economies, worry they ‘can’t do factoring’ without a dedicated factoring law. In practice, factoring can often operate under existing rules on assignment/transfer, secured transactions, and enforcement, if priority and third-party effectiveness are clear.
To help countries go into factoring, UNIDROIT has published a Model Law on Factoring aimed at strengthening legal frameworks for receivables transfers. Despite this, many countries still find it difficult to implement the model law because it may conflict with their existing legal framework. In addition, implementing a new law (and supporting infrastructure) can take time.
Nonetheless, most countries already have laws covering the assignment, transfer, pledge/mortgage of receivables, as well as laws that protect lenders (including factors). Therefore, instead of implementing a new factoring law, these countries may consider mapping their existing laws against the Model Law on Factoring. They may not need to pass a standalone factoring law, but targeted amendments to existing laws may be required.
Although the mapping may not be 100% complete, it can still be useful for factoring companies as long as their rights and priorities are protected. Below is an example of mapping a country’s law against key features of a model factoring law.
Factoring legal framework gap analysis
| Model Law on Factoring | Available in the country’s law? | Changes or amendments needed |
|---|---|---|
| Transfer/assignment of receivables | Yes/No | |
| Effectiveness against third parties | Yes/No | |
| Priority of transfer (ranking) | Yes/No | |
| Collection and enforcement rights | Yes/No | |
| Registration/notice mechanism (registry) | Yes/No |
Is factoring risky?
Factoring is still considered a risky business by many people. This misconception can be addressed by the findings of the EU Federation of Factoring and Commercial Finance (EUF) White Paper on factoring (2019). The main findings are as follows:
- Factoring is growing rapidly.
- Factoring provides funding to large, medium and small businesses.
- Factoring enables businesses in manufacturing, services and distribution sectors.
- The loss given default (LGD) of factoring is low.
This is supported by industry research: according to the EUF’s Whitepaper on Factoring and Commercial Finance (2019), impairment losses in European factoring are very low in absolute terms – between three and four times lower than comparable forms of lending in the EU.
Based on these findings, factoring is generally not considered a high-risk business in Europe – the world’s largest factoring market – because reported loss given default is low.
However, it should be noted that LGD remains is low only when a factor understands the inherent risks of factoring (such as fraud, disputes, and whether receivables are truly factorable) and implements strong risk controls supported by appropriate systems, including factoring software with risk analytics and alerts. Many factoring companies outside Europe and the US have weaker operations and risk controls; as a result, some have had poorer experiences and suffered losses.
Like other regions, Europe has also experienced factoring fraud and losses. For example, there was a major factoring fraud of DM 2 billion in Germany in 1994 involving a company called Procedo.
Instead of withdrawing from factoring, European markets have continued to develop the product while relentlessly improving operations and risk controls to reduce these risks. Many modern factoring systems are now embedded with risk analytics and alerts, helping firms identify red flags earlier and reduce fraud and losses. This has supported Europe’s continued leadership in the global factoring market.
Recent discussions in the trade finance industry highlight these risks and why operational controls matter, with the First Brands case frequently cited as an example of how invoice/receivables financing can go wrong when governance and verification fail (ongoing investigations and court scrutiny).
Certified Factoring Professional (CFaP)
Digitisation of factoring
Many new factoring platforms are digital and come with embedded risk analytics. With advent of new technology, these solutions are often more affordable than older, legacy systems. However, for incumbent players, integrating a new platform with existing core systems can be very costly. In addition, many incumbents need to customise new systems to accommodate established internal practices, which can limit how much of the new technology’s benefits they fully realise.
In contrast, new entrants, especially NBFCs, can adopt modern digital factoring platforms more easily and at a lower cost. These platforms typically include client self-service features that allow clients to upload invoices, request funding, view transactions and download reports 24/7 across multiple devices, including mobile. This straight-through digital factoring is a game changer for the industry.
Factoring working with credit insurance
Historically credit insurance has been viewed as a competitor to non-recourse factoring. However, many experienced factors now use credit insurance as an additional layer of protection against debtor default. In practice, a factor may arrange for a master credit insurance to protect against default by buyer.
This cooperation between factoring and credit insurance has helped factoring grow in many European markets. For example, an FCI-Trade Finance Global case study shared at the FCI 56th annual meeting described Germany as a mature market for this cooperation, with around 95% of factoring covered by credit insurance.
Versatility of factoring
Factoring has evolved into a sophisticated financing facility offered in many forms to meet different client needs. Common types include recourse factoring, non-recourse factoring, notified factoring, non-notified (confidential) factoring, maturity factoring, Islamic factoring, bulk factoring, back-to-back (distributor) factoring, reverse factoring (also known as supply chain finance), syndicated factoring, as well as sector-specific solutions such as construction factoring and transport factoring.
There are also several forms of international factoring. These include direct export factoring, often used by banks with strong regional networks and sometimes combined with credit insurance, as well as two-factor export factoring – either within the FCI network or outside it.
Factoring for large corporate through IFRS 9
Originally, factoring was used primarily by MSMEs. However, factoring is now widely used by large corporates as well. Large corporates may use factoring for credit protection and, in some cases, achieve balance sheet derecognition under IFRS 9.
Under IFRS 9, a company may derecognise (remove) receivables if the transfer meets the derecognition requirements – typically where the company has transferred substantially all the risks and rewards of the receivables. A non-recourse structure can support derecognition, provided it complies with the derecognition conditions under IFRS 9.
For example, a company with outstanding receivables of $500 million may obtain a receivables finance/non-recourse factoring facility and use the proceeds to pay down $500 million of liabilities. If the arrangement qualifies for derecognition under IFRS 9, the receivables may be removed from the books, which can improve balance sheet ratios (and may also support improved working capital metrics such as DSO, depending on reporting). Below shows the changes in the balance sheet is the derecognition is allowed:
| Before factoring | After factoring | |||
| Liabilities | Assets | Liabilities | Assets | |
| Loan $500 million | Receivables $500 million | Loans $0 | Receivables $0 | |
Factoring grows with sales
Factoring limits can be higher than other unsecured facilities because the limit is set largely on the credit standing of the debtors (many of which may be large corporates), rather than only on the client’s own credit standing.
In addition, unlike many traditional facilities, a factoring limit can grow with sales: the more the client sells to debtors acceptable to the factor, the higher the potential financing availability. This has enabled many MSMEs to grow from strength to strength – some eventually becoming large corporates.
Helping banks to reduce the overdue trade bills
Although factoring is normally viewed as a financing tool for MSMEs, it can also help banks reduce overdue trade bills of their clients. For example, when a client has overdue trade bills, failure to settle may result in legal action and may also require the bank to classify the exposure as non-performing.
With factoring, the advance proceeds can be used to settle the overdue bills, potentially helping the client avoid escalation and helping the bank reduce overdue exposure (subject to eligibility, structure, and local regulatory treatment).
Securitisation of factoring company
As non-bank factors grow, they often need banks to provide funding through arrangements sometimes referred to as refactoring. Under such arrangements, a bank purchases or funds a pool of receivables that have been purchased by the factoring company. This can be a secure way for a bank to finance a factor, provided the receivables are eligible and well-controlled.
With bank support, a factor’s funding needs requirement may eventually grow beyond what a single bank can provide. In that case, funding capacity can be expanded through securitisation of the receivables portfolio purchased by the factoring company. An example is Bibby Financial Services (UK), which secured a £1 billion securitisation deal to support its SME/invoice finance activity.
Greatest obstacle to factoring
While the outlook for factoring is good, one of the greatest obstacles that may hamper its growth is prohibition on assignment imposed by large debtors, which can prevent suppliers from using factoring. Increasingly, more buyers – especially larger ones – are incorporating non-assignment clauses in their contracts or purchase orders. Although some factors may try to work around this through non-notification (confidential) structures, these arrangements can increase the risk of fraud and losses if controls are weak.
Recognising the importance of factoring as a source of financing for MSMEs, some governments have taken steps to reduce the impact of anti-assignment clauses. In the UK, regulations make certain contractual terms that restrict the assignment of receivables ineffective in qualifying business contracts.
To enable the MSMEs to have access to financing, the Chinese government has made changes to the Civil code on the creditors (suppliers) right of assignment and agreement on prohibition of receivable is on applicable to factoring
Singapore has taken a different route. Because the government is a major buyer from SME suppliers, it introduced automatic permission for factoring for certain Government contracts (subject to conditions), reducing the need to seek ad-hoc consent. It is hoped that more large buyers will adopt similar approaches to reduce friction for suppliers and support MSME access to receivables-based finance.
Evolution of factoring
Factoring, which began in the US to facilitate trade as early as the 17th century, has evolved from a relatively simple MSME-focused product into a range of structures designed to meet the financing needs of many types of businesses, including large corporates. From the US, factoring has spread to all continents. The advent of new technology has also transformed factoring from a labour-intensive process to a straight-through operation that can be managed with fewer resources.
Factoring will continue to evolve to meet the changing needs of the clients. Some newer structures may not even be recognisable as ‘factoring’ in name. However, regardless of product form, the core legal principle remains the same: the assignment or transfer of accounts receivable.
With factoring continuing to develop, it is increasingly important for practitioners to understand the fundamentals through practical training and recognised factoring courses.
Certified Factoring Professional (CFaP)
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