09/11/2024
Mastering risks and innovating: factoring companies’ strategies to face current economic challenges
The current economic landscape presents a series of major challenges for companies’ cash flow. Rising costs (transport, raw materials, storage, etc.), combined with the increase in interest rates decided by authorities to combat inflation, are complicating the situation. Added to this is the lingering impact of COVID, with repayments of State-Guaranteed Loans (PGE) coming due, further increasing pressure on companies.
In this context, factoring, which is meant to solve cash flow problems, is becoming increasingly expensive for businesses. Moreover, due to the rise in the cost of risk, factors are becoming more reluctant to take on the receivables of certain companies, especially those facing difficulties.
As a result, the factoring market, which had seen nearly 10% growth for several years (excluding the COVID period), is now in decline. According to ASF, factoring market growth was 15% between 2021 and 2022, but it dropped to 12% between 2022 and 2023. This contraction has been confirmed since the second half of 2023 and continues in 2024 with a further 26% decrease in production.
Faced with these challenges, French factors are focusing on risk management to mitigate difficulties. Several key areas are being explored:
- Optimization of business processes: Integrating risk management into teams’ daily activities and embedding it into the company culture is essential. This covers all phases of the contract lifecycle, from credit assessment to monitoring customer financing and “buyer risk.
- Enhancement of risk information systems (IS) with tools dedicated to fraud issues: Fraud detection can be complex. In addition to risk management IS, factors are compelled to adopt complementary and specific tools for fraud detection.
- Deepening KYC (Know Your Customer) for buyers: Strengthening knowledge of buyers, particularly to identify collusion between clients and buyers, a growing concern. While this task is challenging due to the large volume of data, digitizing processes and connecting with reliable data providers can significantly improve compliance efficiency and robustness.
- Optimization of RWA (Risk-Weighted Assets): RWA is a crucial risk management measure in factors’ activity management. Several optimization avenues can be explored, such as developing syndication (especially by assuming the syndication agent role), using credit insurance, and optimizing calculation models by creating internal models approved by regulators.
Moreover, mastering risks is not the only way to overcome the current difficulties. Many French factors are also adopting strategies to conquer new markets:
- Multicurrency contracts: Integrating new currencies allows for diversification of risks and an expanded client base.
- New products tailored to the market context: With the introduction of electronic invoicing, invoice financing is a pathway being explored by several factors.
In conclusion, despite current challenges, the economic context provides factoring companies with an opportunity to strengthen their risk management processes, innovate in their product offerings, and diversify their clientele internationally.