Growing factoring market in Europe, entrepreneurs appreciate the opportunity to become more efficient

Generating an adequate and timely cash flow is one of the biggest challenges in the daily lives of many entrepreneurs. It’s a familiar situation - customers are fed up, invoices are being issued for large amounts, but payments are overdue and there may not be enough money in the current account to cover salaries, taxes and other payments. "I will transfer as soon as I receive the money myself" - such a seemingly logical explanation on the part of the employer will hardly be understood by the employees, on the part of the CEO - by his business partners and the tax office. Factoring  has been developed to solve such situations - a financial instrument that is in demand worldwide and solves the situations described above. Simply put, the bank or other financier takes over the entrepreneur’s invoices, pays them immediately (usually around 90% of their amount) and then turns to the recipients of the services or goods to recover the money in full.

The biggest advantage for the users of factoring is the quick access to the money, as the money is usually credited to the account on the same day that the invoices are received. This allows the entrepreneur to plan their activities and make the necessary investments without having to think about whether problems will arise at some point due to insufficient cash flow. There are three common types of factoring on the financial market - domestic factoring (for domestic trade in products and services), export factoring (for exporters, allows receiving payments in the currency in which the invoice was issued), reverse factoring (the company receives financing to pay supplier invoices). Although more and more Latvian companies have come to appreciate the advantages of factoring in recent years, the factoring business in Latvia is at least five times smaller than that of our Baltic neighbours when it comes to this form of financing.

Factoring turnover in the Baltic market amounts to around EUR 10 billion, according to data recently published by the international organisation FCI (Factors Chain International) on the factoring market in 2023. In Lithuania, the factoring market amounts to just over EUR 5 billion, in Estonia less than EUR 4 billion and in Latvia around EUR 0.8 billion. Last year, the factoring volume in the Baltic states fell by 4.4 %, with the largest decline (-12.8 %) being recorded in Latvia. One of the main reasons why Latvia is lagging behind in this important form of financing for entrepreneurs is the lower level of business activity (fewer companies) and a lack of understanding of the benefits of factoring. In this respect, Latvia "falls out" of the general trend in Europe, where factoring is very popular with entrepreneurs. According to the FCI, Europe’s share of the global factoring market is as high as 67% and exceeds the volume of EUR 2.5 trillion (2023).

Our experience shows that communication with entrepreneurs is of great importance in order to explain the advantages of factoring and how this instrument works. This helps to dispel misunderstandings and encourages many to try out how factoring can make their business more efficient. We can be proud of the fact that SEB share of the Latvian factoring  market has increased from around 23% to almost 31% in the past year. In the first quarter of this year it reached almost 38% (in May 2024 our factoring portfolio reached EUR 66.3 million).
The number of factoring customers worldwide currently exceeds one million companies. Every year, new companies use this service to secure their liquidity and organise their business more efficiently. Last year, the market for reverse factoring grew strongly (+38.7%). It offers the supplier the opportunity to get paid faster and to adjust the financing costs to the buyer’s credit risk. In 2023, reverse factoring services accounted for 17% of the total factoring volume worldwide. This trend is expected to continue in the coming years as companies look for ways to optimise their supply chain and reduce costs.

Will our entrepreneurs also use this opportunity to improve their efficiency and competitiveness? That depends largely on awareness, interest and business activity in general. Financiers are ready to expand the factoring market - we see great development potential here, both for each individual entrepreneur and for our economy as a whole.

Jānis Moisejs, SEB Head of Factoring