Debt service grows by factor of 10

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The Independent Online
Any small firms which have wondered why it seems as if every post brings a marketing flyer from a company claiming to be able to transform their financial situation by taking on their bad debts should now know the reason: there are now more than 10 times as many factoring companies in Europe as there were 30 years ago, writes Roger Trapp.

Indeed, factoring - a technique that is also known as invoice discounting and at its most basic involves the selling of trade debts as discount - has seen its image transformed in recent years. The concept used to be regarded as a last resort - any company using it was effectively sending a signal to suppliers and customers that it was in a bad way. Now it has become commonplace as a means of helping small businesses through liquidity problems.

A report just released claims that worldwide factoring volume passed $340bn (pounds 216.5bn) last year, with the figure for Europe $208bn, compared with $40bn in 1985. The United States is still the largest market, with a volume last year of just under $61bn. But Italy (with around $54bn) and Britain (with $52.3bn) are not far behind, says the World Factoring Yearbook 96/97, published by BCR Publisher in association with Factors Chain International.

The most dramatic growth of recent years has occurred in the Asia-Pacific region, where domestic factoring has grown at 25 per cent a year for the past five years, while international factoring has expanded at twice that rate. The report predicts that the next boom areas will be Latin America and eastern Europe.

It is estimated that about 700 factoring companies in 50 countries around the world are helping more than 100,000 businesses use factoring to settle trade debts with 8 million customers.

Michael Bickers, editor of the report, said: "The growth of factoring is largely in response to the huge increase in numbers of small and medium- sized enterprises over the last 30 years, particularly in Europe. These businesses often suffer liquidity problems. Factoring appears to be a solution for many."

Jeroen Kohnstamm, secretary general of Factors Chain International, added that companies were gaining from the benefits of consistent cash flow, lower administration costs, reduced credit risk and devoting more time to core activities.