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In April 2021, the world of football was rocked by the announcement of the European Super League (ESL), a proposed elite competition that sought to permanently place Europe’s top football clubs in a closed league. 

The plan – met with widespread criticism – was seen as a move that prioritised financial gain over sporting merit, threatening the inclusive nature of the sport by potentially leaving smaller clubs and their fans behind. 

This incident serves as a parallel in the world of finance, particularly within the factoring industry, raising pertinent questions about ensuring growth, resilience, and inclusivity. As the factoring sector continues to expand, significantly impacting global trade and economic development, it faces the challenge of evolving without creating disparities reminiscent of the ESL debacle. 

To better understand the principles of financial inclusion, equitable regulation, and sustainable growth in the factoring industry, Trade Finance Global’s (TFG) Deepesh Patel spoke with new FCI Secretary General, Neal Harm. 

Understanding factoring: A catalyst for global trade

Factoring is a financial service that profoundly impacts global trade and economic development. 

This service involves financing receivables, where a business sells its invoices to a third party at a discount in exchange for immediate cash, allowing the business to improve its cash flow and access working capital without needing to wait months for its invoices to be paid according to their credit terms. 

Factoring is a big business, and getting bigger.

Harm said, “It’s estimated that volumes of global factoring are over $3.6 trillion per year, growing consistently.”

This growth embodies the multiple ways that this financial mechanism serves as a catalyst for global trade growth. 

Firstly, it addresses a critical pain point for businesses, especially small and medium-sized enterprises (SMEs), which often struggle with cash flow due to delayed customer payments. By providing immediate liquidity, factoring enables these businesses to continue their operations, invest in growth, and take on new opportunities without being constrained by cash flow issues. 

Secondly, factoring is particularly beneficial in financing open account trade receivables, a common practice in international trade where goods are shipped and delivered before payment is due. 

This aligns with global trade needs, where extended payment terms are standard and can pose significant risks and liquidity challenges for exporters.

The factoring industry can tap these benefits for global markets by increasing awareness and understanding of factoring and by fostering partnerships with financial institutions and regulators. 

Harm said, “What’s interesting – and it’s history repeating itself – is how we’re entering those emerging markets today. It’s no different than 56 years ago. It’s learning about the market, advocating for the product, and educating the members on what this product is and what it isn’t. Then it’s watching it grow.”

By following this proven approach, the industry can open up new markets and support trade finance in regions where access to traditional banking and financial services is limited, helping to lift nations out of poverty and facilitating their integration into the global economy.

Expanding horizons: Factoring’s growth in emerging markets

Factoring has significant growth and potential in emerging markets, underlining its vital role in enhancing economic development and facilitating trade. 

Harm said, “If you think about the African region or the Southern Asian region, particularly India, there’s a huge opportunity for growth as they mature with open account finance.”

This opportunity lends itself to the evolving understanding and adoption of factoring as a crucial financial service that supports businesses in managing cash flow and accessing working capital efficiently.

A key aspect is the exponential growth potential of factoring in these markets, propelled by increasing trade volumes and the need for alternative financing solutions that complement traditional banking services. 

The growth of factoring in developing regions is not just a function of the expanding global trade but also a result of deliberate efforts towards education, advocacy, and the establishment of supportive regulatory frameworks that recognise invoices as investable assets. 

Harm said, “It’s complex and it requires coordination between banks, financial institutions, and regulatory agencies. With all of those groups working together, we can figure out the best way to make an invoice into an investable asset –  the regulations we need to put around it, how we secure it, and how we bring liquidity into the market to support it.”

Moreover, the strategic partnerships between global institutions like FCI and other local stakeholders can help to foster a deeper understanding of factoring and are crucial in creating an ecosystem where it can thrive by aligning businesses, financiers, and policymakers.

Vision and challenges ahead: Insight from FCI’s new secretary general

The FCI’s mission is to ensure the resilient, sustainable, and inclusive growth of factoring on a global scale. Central to this objective is the recognition of factoring as a financial tool and a vital component of the global trade ecosystem that can drive economic development and alleviate poverty. 

Harm said, “It comes down to awareness, advocacy, and education. That’s what FCI is there for. For us to be aware of what’s going on in the market, advocating as we see something happening, and then educating as fast as we can, to bring people up to speed.”

Recognising the challenges and opportunities of regulatory changes and economic trends, FCI positions itself as a voice for the factoring, open account and trade finance industries, engaging with policymakers and stakeholders to advocate for regulations and policies that support the growth of these markets. 

Through these efforts, the organisation aims to address potential challenges head-on, such as those arising from European late payment regulations, by promoting awareness and education, which can lead to more informed and constructive policy-making.

At the heart of FCI’s vision is the desire to see factoring and open account receivables recognised as a critical element of the global trade finance landscape, capable of driving significant economic benefits. 

Harm said, “I want FCI to be three letters that come immediately top of mind when someone is thinking about open account. If we’re talking about a receivable, the transaction, the financing, whether you’re a bank, whether you’re a regulator, we’re part of that conversation.”

This vision is not only about fostering growth in the volume of factored receivables but also about ensuring that the benefits of factoring are widely and equitably distributed, supporting businesses in developed and emerging markets alike.

Just as the football world united against the exclusivity of the ESL, the factoring industry must embrace inclusivity, ensuring no small player is left behind in the pursuit of global economic progress.

Putting the idea into practice, FCI is hosting their 56th Annual Meeting in Seoul, South Korea from 9-13 June, bringing together all global professionals to further the discussion into factoring and receivables finance.

For Harm, this event offers the opportunity to grow the industry. He said, “A big part of the event of awareness, advocacy, and education… It’s to have time with each other, learn how to do business and how to make money together. And again, to take that friction out of the transaction as it goes cross-border.”