Recent dispatches in the media on its supposed demise are greatly exaggerated, however. And the principles and mechanisms underpinning it, and the finance it provides, have never been more important for businesses of all sizes.

Divided by uncommon language

Ambiguity about what is actually meant by ‘factoring’ is part of the story. For instance, UK Finance and a significant part of the industry in the UK that provides finance to businesses against the debts owed to them by their business customers distinguishes between factoring, invoice discounting and asset-based lending. The first two together comprise invoice finance, with ‘factoring’ used to specifically describe facilities which combine finance with a service element of collections or ledger management.

Noun or verb 

In many other jurisdictions around the world, that distinction has far less emphasis, however. Often factoring will be used as short-hand to describe both the practice of advancing finance on the basis of rights to future payment, and the entirety of the extended universe of those products. So this could stretch from working capital support provided to a small engineering business in the north of England, say, to the types of opaque financial engineering (allegedly) recently seen in some corporate situations over the Atlantic: some similarity in terms of underlying mechanism; a world of difference in terms of purpose and delivery.  

Lingua franca

Variances in terminology are also amplified by how the products have evolved in different jurisdictions and different commercial cultures, having been more often moulded by largely national frameworks of company and property law rather than by harmonised financial services legislation. 

The flexibility of English law enables the growth of receivables-focused undisclosed invoice discounting to an extent unseen in other jurisdictions, for instance. In Spain, on the other hand, payables-focused confirmación de factoring – sometimes referred to as ‘reverse factoring’ – is prominent.

And to muddy things even further, in the Francophone world, the term factoring itself stems from an invoice being une facture and the financial service thus being l’affacturage. Whereas in English, the emphasis has always fallen on the agency aspect of the term, hence the more prominent use of the term to describe wholesalers in specialist industries, or Scottish property managers.

How it started… 

Factoring in the narrower sense is the ‘original’ product, dating back to either the 17^th Century cloth-traders of Blackwell Hall in the City of London, or Ancient Mesopotamia, depending on which wiki-rabbit-hole you go down. 

And as a disclosed facility – the factor receives payments directly – it remains the most visible variant, hence the persistence of the term. In the UK, factoring as we term it is now the minority product, however, being used by around one third of the 30-40K businesses that will be supported by invoice finance and asset-based lending overall, with the majority using undisclosed facilities. These often being smaller client businesses, the proportion of finance advanced through factoring facilities is lower still. The reasons for this evolution are myriad but technology enabling more finance to be provided through undisclosed facilities is certainly one. And vibrant competition and increasing customer expectations driving change in product offerings is another.

…vs how it’s going 

But factoring in the narrower definition nonetheless remains an essential product for well over 10K businesses. And while recent media coverage [some of it confusingly describing ‘invoice financing’ and ‘factoring’ as the same thing] notes that some of the banks are looking to support client businesses in different ways, there remain a significant number of specialist providers both inside and outside UK Finance’s membership that continue to focus on providing a service-oriented factoring proposition for businesses.

And the invoice finance and asset-based lending sector overall is providing more finance than it ever has, with UK Finance’s members advancing over £21 billion to UK businesses at any one time, supporting total client turnover of over £315 billion annually.

Whether through factoring, invoice discounting, wider asset-based-lending or any of the other variations that technology is enabling, the core tenets that have underpinned the delivery of these products for centuries remain. Those principles of prudent but flexible lending, firmly based on strong relationships and a real understanding of client businesses and the opportunities and challenges they face, have never been more important in an uncertain world.

More information on invoice finance, asset-based lending and other forms of commercial finance can be found at Better Business Finance. 

UK Finance is also supporting BCR’s 2nd Annual UK Invoice Finance and ABL Summit on 2 and 3 March at the Birmingham Conference and Events Centre.