COVID-19 has led to the most severe economic downtrend in Northern Europe, and indeed across most of the world, for generations. Survey results estimate that 50% of Europe’s SMEs are at risk of bankruptcy during 2021 if revenues do not pick up. If SMEs fail en masse and default on their loans, the ripple effects will hit larger companies and could further compromise a global financial system already stressed by the pandemic.
But as large commercial lenders recover losses from bad loans, they are likely to hold potential clients to a high standard that SMEs will struggle to meet. This tightening of the credit market could therefore create a pipeline for receivables finance and other forms of asset-based lending.
Furthermore, recent disruptions to trade and logistics brought about by the pandemic are leading to changes in attitude to the supply chain, creating new working capital requirements, for example, holding more inventory. This brings about new opportunities to support the supply chain by expanding SCF offerings. Companies and financial institutions will need to have both the IT support and product, methodology and protocol expertise to rely on as they adapt to these changes.
Receivables finance in Northern Europe
How has the receivables finance sector been affected by the pandemic in Northern European countries? Although full year figures for 2020 are not yet available, in H1 2020 overall receivables finance turnover in Europe was down 6.4%. There was decent performance in Q1, a dip in Q2, some recovery in Q3, but Q4 once again saw a drop off in business for many. However, before the pandemic, the story was positive. Receivables finance client turnover in Europe in 2019 was €1.9tn, or 11.3% of EU GDP. In Northern Europe alone, this figure was €1.32tn where France, UK and Germany are the two main players.
Factoring in France prior to the pandemic was extremely healthy. Receivables transferred to French factoring companies in 2019 reached a total of €349.7bn, the highest amount ever achieved in a year. Receivables finance client turnover stood at 14.5 per cent of French GDP in 2019, up from 13.6 per cent the year before and above the EU level of 11.3 per cent. French factors have developed an offer dedicated to microbusinesses, and the French market is first in the world in terms of international factoring. And, looking ahead, there is still great potential for growth, with only a very small percentage of SMEs in France currently making use of the product.
In Germany, the factoring GDP penetration ratio exceeded eight per cent for the first time in 2019 and is now approaching that of other economies in the EU that use factoring on a significantly greater scale. For a comparatively small financing industry with just over 4,600 employees, this is a good result. Looking ahead, a significant increase in corporate insolvencies is expected, even with the German government launching safeguarding measurements for the economy, such as the far-reaching payment moratoriums now made possible as a result of the so-called Pandemic Act. On the other hand, looking back in time, years of crises have been good years for factoring. For example, during the 2008/2009 financial crisis many clients in Germany discovered factoring as a financing alternative and then remained loyal to this form of financing in the good years that followed.
This trend was also observed across other Northern European countries such as Denmark. Factoring volumes reached €18.8bn in the country in 2019, representing five per cent of GDP, and this proportion has grown considerably since the financial crisis. Indeed, many clients learnt the hard way that relying on only one source of bank financing was too risky, which led to factoring growing as an alternative source of financing. In addition, Danish clients’ extreme focus on liquidity management is a key driver.
Looking ahead, of course, there is still significant uncertainty around likely recovery times, not just in France, Germany and Denmark but across all of Europe. According to a World of Open Account survey from December, half of respondents believed a general business recovery would take 12 months or longer. But looking back over the last 10 years in the EU, the growth rate of receivables finance per year has consistently been higher than GDP growth rate. And in 2010 after the financial crisis, receivables finance growth spiked back up strongly after a contraction in 2009. So, while the next year will no doubt be challenging, we could see a similarly strong bounce back and a new generation of clients that are introduced to this form of financing who remain loyal in the future.
A shift in attitude to the supply chain
Looking at trends across supply chains in Northern Europe more generally, recent disruptions to trade and logistics brought about by the pandemic are leading to changes in attitude to the supply chain. Before the pandemic, discussion was around optimising working capital, with single sourcing, longer global chains, single paths (which lead to domino risks) and just-in-time delivery. Now, there is a shift toward working capital sufficiency. This means backup/multiple sourcing, shorter and more regional chains, multipath chains (to mitigate risks), and protected inventories.
These shifts have resulted in new working capital finance requirements for companies, with new opportunities for banks and lenders to support the supply chain by expanding SCF offerings, whether through traditional receivables finance, reverse factoring, asset-based lending or securitisation. Likewise, there will be new opportunities for banks to form partnerships with third parties to help de‑risk supply chains.
Most importantly, banks and other lenders will require the right product solutions, methodologies and protocols to help them navigate this change and capitalise on opportunities and will likewise need sophisticated IT solutions to support them. The good news is that these are already on the market, and at HPD Lendscape we have been working hard to ensure our products and solutions are ready to adapt to new market conditions.
Ultimately, solutions such as receivables finance are a way to contribute to the post COVID-19 economic recovery in Europe by financing the working capital of SMEs and large corporates, too. No doubt when figures come out later this year, we’ll see the negative effect of the pandemic on overall volumes, but with a disciplined approach and being alive to the needs of lenders and SMEs, we can look forward to a much rosier picture in 2022.