Factoring has evolved into a powerful financing tool that drives growth for businesses worldwide. Despite its long history and proven track record, the factoring market is still widely misunderstood, often perceived as a last-resort, high-risk, or excessively expensive financing method used only by companies in distress. In reality, factoring can be an efficient, secure, and flexible way for businesses of all sizes to convert outstanding receivables into immediate operating capital.
Below, we explore the current state of the global factoring industry, its potential to close the financing gap for micro, small, and medium enterprises (MSMEs), and the most common misconceptions that prevent companies from leveraging factoring to its fullest potential.
- Global Overview and Growth
- The MSME Financing Gap
- Overcoming Negative Perceptions
- What Factoring Really Is
- Common Misconceptions About Factoring
- 1. “Factoring Is Too Expensive.”
- 2. “Factoring Is High-Risk.”
- 3. “Only MSMEs Use Factoring.”
- 4. “Factoring Is a Last Resort.”
- 5. “Factoring Is Labor-Intensive and Burdensome for Clients.”
- 6. “Factoring Is Very Difficult to Sell.”
- 7. “Factoring Is a Loan.”
- Post Scriptum and Further Resources
Global Overview and Growth
According to data from FCI (Factors Chain International), the global volume of factoring has grown at an average annual rate of 2.53% over the last seven years—rising from EUR 2.347 trillion in 2014 to EUR 2.726 trillion in 2020. Factoring is present on every continent, with the largest market share in Europe (EUR 1.845 trillion). Other significant markets include:
- Asia-Pacific: EUR 687 billion
- South America: EUR 83.5 billion
- North America: EUR 66.5 billion
- Africa: EUR 25.5 billion
- Middle East: EUR 9.5 billion
These figures underscore factoring’s importance as a mainstream financing tool around the globe.
The MSME Financing Gap
A 2017 report by the International Finance Corporation (IFC) found that MSMEs worldwide face a combined financing gap of approximately USD 5.7 trillion every year. Many of these smaller businesses cannot easily obtain traditional loans because they lack physical collateral. By leveraging their accounts receivable—the largest asset on their balance sheets—MSMEs can tap into financing that might otherwise remain out of reach.
Additional resource:
Overcoming Negative Perceptions
Despite factoring’s potential benefits, many still regard it as a costly or “last-ditch” method used only by struggling businesses. Such perceptions can deter potential clients before they have fully considered the advantages factoring provides. To avoid this stigma, some providers market factoring under various labels—invoice financing, receivables financing, accounts receivable management, supply chain financing, and more. However, these terms often contribute to the confusion surrounding an already misunderstood concept.
What Factoring Really Is
At its core, factoring is the purchase of a seller’s receivables by a specialized company or a bank (the “factor”). Depending on the agreement, the factor may provide:
- Advance (Financing): Immediate cash based on a percentage of the invoice face value.
- Credit Protection (Non-Recourse Factoring): Protection against the risk of buyer default.
- Sales Ledger Management: Recording and monitoring receivables.
- Collection Services: Handling the collection of payments from buyers.
Properly structured, factoring does not simply offer working capital; it also reduces credit risk and relieves the seller of administrative burdens associated with collecting payments.
Common Misconceptions About Factoring
Below are the most frequent myths that hold businesses back from taking full advantage of factoring.
1. “Factoring Is Too Expensive.”
The idea that factoring is expensive often arises because factoring fees typically include two components:
- A service (or handling) fee,
- An interest (or discount) rate
At first glance, the combined total of these two fees may appear high compared to a simple loan rate. Some factors and fintech providers merge these charges into a single monthly fee, making the comparison with standard bank loans or overdrafts seem unfavorable. However, if you break them down, they become more aligned with comparable services in traditional financing:
- Interest Rate: Comparable to what a bank would charge for an unsecured line of credit or overdraft.
- Service Fee: Covers additional value-added services such as credit protection (similar to credit insurance) and receivables collection.
Because factoring can bundle financing, credit insurance, and collection services into one package, it provides more than a typical loan ever would.
2. “Factoring Is High-Risk.”
Contrary to this notion, factoring is often a lower-risk proposition when properly managed. In a white paper, published by the European Federation for Factoring and Commercial Finance (EUF), default-related losses in factoring remain relatively low. While high-profile fraud cases in Asia have drawn media attention, they overshadow the many factoring companies worldwide that operate profitably and maintain low rates of default.
Successful factors implement robust due-diligence and risk-control measures. For instance:
- Credit Insurance: Used to mitigate domestic or foreign receivables risk.
- Import Factor Arrangements: For international trade, a local factor can assume the buyer’s credit risk.
- Integrated Monitoring: Ensures that all invoiced goods or services have been delivered as promised, minimizing fraud.
Also, properly structured factoring can enhance a bank’s security position by routing proceeds from collected invoices toward repaying any outstanding balances.
3. “Only MSMEs Use Factoring.”
While it’s true that many MSMEs rely on factoring, but large corporations also benefit significantly. A major incentive is the ability to remove accounts receivable from the balance sheet (in the case of non-recourse factoring), improving both Days Sales Outstanding (DSO) metrics and Return on Assets (ROA). Additionally, large manufacturers sometimes utilize distributor factoring or back-to-back factoring to support distributors with weak credit ratings.
4. “Factoring Is a Last Resort.”
Factoring is often the first financing tool for many new or rapidly growing companies, especially those without substantial physical assets for collateral. Since factoring is tied directly to receivables, the available funding grows in tandem with sales. This gives a fast-scaling business, which might otherwise be rejected by traditional lenders, the working capital it needs.
A notable example of this is the early-stage growth of Dell Inc. In its formative years, Dell relied on receivables-based financing to fund increasing demand—long before it secured major bank loans or went public. This agile financing approach helped accelerate the company’s climb toward market dominance.
(Reference: Fortune Magazine, September 8, 1997, Andrew Serwer article on Michael Dell.)
5. “Factoring Is Labor-Intensive and Burdensome for Clients.”
Historically, factoring involved substantial paperwork, repeated invoice submissions, and ongoing ledger management. Modern technology has largely addressed these issues. Today, many factors offer digital platforms that connect sellers, buyers, and the factor in real time:
- Customer Onboarding: Fully digital registration and compliance checks.
- Invoice Submission: Electronically upload invoices and documentation through a secure portal.
- Reverse Factoring: In cases where buyers initiate the factoring process, the seller’s role is minimized to delivering goods and uploading the invoice.
Mobile notifications further simplify the process, enabling clients to receive near-instant updates about available financing.
6. “Factoring Is Very Difficult to Sell.”
In practice, factoring is a multi-feature financial product that can be presented based on the client’s specific needs. The key to successful selling lies in shifting away from purely feature-driven explanations and focusing on tangible benefits:
- Improved cash flow and working capital
- Mitigation of credit risk through non-recourse factoring
- Access to collection and ledger management services
- Opportunity to expand sales—domestically and internationally—by offering more flexible payment terms
Sales professionals who help clients see how factoring directly solves cash flow challenges, reduces risk, and supports growth find it far easier to gain buy-in by helping clients.
7. “Factoring Is a Loan.”
Although certain factoring agreements may look similar to traditional financing, factoring is technically the purchase of receivables at a discount, not a loan. Under IFRS 9, non-recourse factoring can qualify as a true sale of receivables, allowing:
- The factor to record the purchase as an asset on its books.
- The seller to remove the corresponding receivables from its balance sheet.
In many jurisdictions, this distinction grants the factor the right to pursue the buyer directly, if payments are not made—unlike with a pledge-based lending facility.
Post Scriptum and Further Resources
With proper processes and controls, factoring can be both profitable and secure for financial institutions, fintech companies, and their clients. While it may appear complex from the outside, enhanced understanding and modern technology have streamlined factoring into a powerful tool that helps businesses of all sizes grow and manage their working capital efficiently.
In future publications, we will continue to address widespread misconceptions about factoring—equipping you with the knowledge and confidence to introduce factoring solutions, expand your market reach, and manage factoring operations with ease.
Additional Reading & Resources
- FCI Official Website
- European Federation for Factoring and Commercial Finance (EUF)
- IFRS 9 Overview
- ICC (International Chamber of Commerce)
By understanding the true nature of factoring, financial professionals, business owners, and prospective clients alike can better appreciate how this versatile solution can support sustainable growth in a dynamic global economy.